A Fixed Income Investing Approach Following Fed Rate Hike

The Agg as been the go-to benchmark for many fixed-income investors. The benchmark tracks U.S. investment-grade corporate bonds, mortgage-backed securities and U.S. Treasuries. However, potential investors should note that the index excludes municipal bonds, Treasury inflation-protected securities and high-yield debt.

As the Federal Reserve looks to normalize interest rates, bond ETF investors have shown greater interest in actively managed options that could better adapt to the higher rates.

“While Treasuries and related government debt have low credit risk by nature, the Agg’s high concentration of government holdings greatly increases its interest rate risk,” according to State Street. “As the Agg’s duration has spiked—recently surpassing six years for the first time in history—its yield has plummeted. Given that yield has historically translated into returns, this means Agg investors are accepting less return for a higher amount of risk—quite an asymmetrical risk/return profile, in a time where macro forces have raised uncertainty and caused spikes in bond market volatility.”

TOTL, which holds almost 630 bonds, has a modified adjusted duration of 4.4 years. The ETF’s 30-day SEC yield is almost 2.8%.

For more on bond ETFs, please visit our fixed income category.