Short-term bonds were the apple of fixed-income investors’ eyes as they longed for shorter durations during the oscillations of October’s volatility, fleeing to the safe confines of short-term fixed income ETFs.
The month of October wasn’t only a signal to stock investors that due diligence was necessary when screening for quality U.S. equities going forward, but it also put fixed-income investors on notice that the same caution is imperative for the bond market.
Short Duration Safety Net
As such, an emerging theme that rose out of the volatile October was a need for more short duration exposure, according to Kari Droller, Vice President of Third-Party Mutual Fund and ETF platforms at Charles Schwab.
“In October, U.S. fixed income flows represented a whopping 98% of ETF flows, but that’s mostly due to the fact that we saw weaker flows in U.S. equities and the sectors,” Droller said during a media call.
“(We saw) positive flows in short-term bonds and safe categories,” Droller added.
The shift to safety in short duration debt came after Charles Schwab said that during the first three quarters of 2018, investors’ focus was scattered, including capital allocations into U.S. fixed income assets.
“For the first three quarters of the year, investors have been adding pretty broadly across the board,” said Droller. “I’d say most heavily to international equity, US equity, equity sector funds, as well as U.S. fixed income.”
However, Charles Schwab did notice that as international markets, especially emerging markets, were battered due to a rising dollar and increasing global rates, a subsequent move away from debt abroad was apparent.
“We’ve noted some weakness in international fixed income due to the strengthening dollar and low global interest rates,” said Droller.
Even with the risk-on sentiment witnessed during the height of the bull market, Droller noticed a shift from high yield and longer duration bond funds.
“On the fixed income side, flows were positive for nearly all Morningstar categories for the first three quarters with the exception of some of the riskier sectors like high yield and long-term bond ETFs,” said Droller.
Options for Short Duration
Investors can limit exposure to long-term debt with ETFs like the SPDR Portfolio Short Term Corp Bd ETF (NYSEArca: SPSB), which seeks to provide investment results that correspond to the performance of the Bloomberg Barclays U.S. 1-3 Year Corporate Bond Index. SPSB invests at least 80 percent of its total assets in securities designed to measure the performance of the short-termed U.S. corporate bond market. Ideally, shorter-term bond issues with maturities of three to four years are ideal to minimize duration exposure should the bull market enter another correction phase.
Another short-term bond ETF option is the iShares 1-3 Year Credit Bond ETF (NASDAQ: CSJ), which tracks the investment results of the Bloomberg Barclays U.S. 1-3 Year Credit Bond Index where 90 percent of its assets will be allocated towards a mix of investment-grade corporate debt and sovereign, supranational, local authority, and non-U.S. agency bonds that are U.S. dollar-denominated and have a remaining maturity of greater than one year and less than or equal to three years–this shorter duration is beneficial during recessionary environments or deeper corrections in the market.
For more real estate trends, visit ETFTrends.com