Avoid Duration Drift Risk With These U.S. Treasury ETFs | ETF Trends

U.S. Treasury exchange traded funds represent more than $200 billion in assets within the $1.2 trillion U.S. fixed income ETF marketplace. However, nearly all current U.S. Treasury ETFs focus on maturity, which can pose a challenge for investors looking to manage their portfolios to specific duration targets.

Put simply, duration is the risk related to how sensitive a bond’s price is to a 1% change in interest rates. The higher the duration, the more sensitive a fixed income investment will be to interest rate changes.

“Managing duration exposure in investment portfolios with the prevailing maturity-based U.S. Treasury ETFs can be challenging given that the duration of these funds fluctuates over time,” according to a white paper from BondBloxx Investment Management. “Specifically, as interest rates rise or fall, the duration of the U.S. Treasury securities in these funds drift lower or higher over time, known as ‘duration drift,’ which sometimes can be quite dramatic.”

By design, target duration U.S. Treasury indexes maintain a constant level of duration sensitivity throughout varied yield environments. So, investors in these ETFs need to keep close watch on their portfolios and rebalance them regularly to keep their desired duration exposure.

To address this challenge, BondBloxx has launched a suite of eight target duration U.S. Treasury ETFs to offer investors more precise duration management tools.

The BondBloxx Target Duration U.S. Treasury ETFs track indexes, developed by Bloomberg Index Services, are based on duration-constrained subsets of U.S. Treasury bonds with more than $300 million outstanding. In accordance with the index methodology, the BondBloxx Target Duration U.S. Treasury ETFs are rebalanced monthly by the BondBloxx portfolio management team to each target duration.

These ETFs can help investors quickly implement and maintain their preferred tactical duration exposure. They can also provide investors with a more precise way to manage portfolio duration with U.S. Treasuries without having to monitor for duration drift or executing rebalances.

The new ETFs add to the existing 11 BondBloxx products that have been launched since February 2022, including seven industry sector-specific high yield bond ETFsthree ratings-specific high yield bond ETFs, and one short-duration emerging market bond ETF.

BondBloxx was launched in October 2021 to develop precision fixed income ETFs. In a landscape where less than one quarter of the ETF products available in the U.S. provide fixed income exposure, the company aims to provide better tools for investors to manage their fixed income portfolios.

“BondBloxx has continued to launch innovative products since its founding and has expanded the ETF universe with targeted products where there is white space,” said Todd Rosenbluth, head of research at VettaFi. “Their broad range of fixed income funds makes them a firm to watch as the asset category grows.”

For more news, information, and strategy, visit the Institutional Income Strategies Channel.