Use Short-Duration Bond ETFs in a Rising Rate Environment | ETF Trends

Fixed-income investors should consider the benefits of short duration, cash alternative exchange traded fund strategies to hedge against ongoing bond market risks and produce yields along the way.

In the upcoming webcast, Buyer Beware or Act Now? Ultra-Short Fixed Income Implementation Ideas, Ben Becker, exchange traded fund (ETF) product specialist at Goldman Sachs Asset Management, noted that the U.S. fixed-income ETF industry has enjoyed phenomenal growth over the years. Industry assets under management have nearly doubled every 3.5 years since the category’s inception and now stand at almost $1.3 trillion, and there is still more room for growth as the fixed-income ETF market only represents a sliver, or 2%, of the total U.S. debt market.

Alexandra Lawson, client portfolio manager of fixed income at Goldman Sachs Asset Management, outlined the current fixed-income market environment with a rising interest rate outlook. History shows that yields will rise as growth and inflation outlooks improve, making short duration more favorable.

Consequently, the dramatic rate increases have now created opportunities for fixed-income investors. Lawson pointed out that 1-Year U.S. Treasury yields have risen 258 bps YTD to price in persistently higher inflation and more aggressive Federal Reserve policy. Short-duration strategies could complement both cash and longer-dated bond allocations, offering potentially lower volatility versus longer duration bonds while preserving most of the carry. Additionally, investors should keep in mind that ultrashort and short-duration bonds have exhibited strong risk/reward profiles during past Federal Reserve hiking periods.

“Despite recent market volatility, investors may benefit from higher starting yields and improved forward return potential at the front end of the curve, creating a strong potential risk/reward tradeoff,” Lawson said.

Becker highlighted Goldman Sachs Asset Management’s Access ETF suite as part of the new breed of bond ETF strategies that has helped investors capture fixed-income market exposure through the guidance of a seasoned asset manager. Goldman Sachs’ Access ETFs provide exposure to important credit metrics incorporated into a rules-based, passively implemented methodology. They seek to provide the best execution and trade management with extensive relationships in the industry. Additionally, risk management and optimization help measure risk and minimize tracking errors.

For example, the Goldman Sachs Access Ultra Short Bond ETF (GSST) provides exposure to a broad universe of ultra-short duration, high-quality fixed income securities. The ETF tries to generate potentially higher returns relative to traditional money market funds while seeking to preserve capital.

Additionally, the Goldman Sachs Treasury Access 0-1 Year ETF (NYSEArca: GBIL) looks to reflect the performance of the Citi US Treasury 0-1 Year Composite Select Index, which is comprised of U.S. Treasury obligations with a maximum remaining maturity of 12 months. U.S. Treasury obligations refer to securities issued by the U.S. Treasury, where the U.S. government backs the payment of principal and interest.

“Access ETFs seek to provide investors with exposure to a certain asset class or market beta. We aim to improve upon the exposure to the market beta rather than redefining it and seek to find intelligent methods to achieve this exposure,” Becker said.

“Access ETFs focus on risk-adjusted returns by minimizing exposure to tail risk in fixed income markets We believe the application of liquidity criteria, a technical or fundamental screen may minimize exposure to less liquid or fundamentally stressed securities,” Becker added.

The strategists explained that using GBIL and GSST to build your short-duration fixed income portfolio may offer flexibility in yield and duration based on risk preferences. Additionally, by expanding the investable universe from GBIL’s universe of treasuries to include securitized and corporate fixed income, GSST seeks to add incremental opportunities for yield

Financial advisors who are interested in learning more about short-duration, cash alternative strategies can watch the webcast here on demand.