Advisors Prefer Short Duration
At the Charles Schwab Institutional Conference in Washington, DC, ETF Trends Publisher Tom Lydon got a pulse on the markets through the lens of financial advisors–the same individuals who witness firsthand what investors are and aren’t clamoring for when it comes to their capital allocations. One of the topics that came up was fixed-income investments and the move to short duration.
With the short-term rate adjustments being instituted by the Federal Reserve, investors can limit exposure to long-term debt issues and focus on maturity profiles. As a result, shorter durations are in favor on the fixed-income front to prevent prolonged exposure to a bond market that’s seen its fair share of rising Treasury yields as of late.
“There’s also lower duration on the bond ETFs that advisors are going into,” said Lydon during “Countdown to the Closing Bell”. “Long duration is frankly risky in a rising rate environment.”
Examples of bond ETFs with short duration exposure include 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. Another 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, which includes debt that has a remaining maturity of greater than one year and less than or equal to three years.
Duration hedging strategies like TMV will continue to be beneficial as a final rate hike for 2018 looms in December. According to CME Group’s FedWatch Tool, there is a 72.1% chance that the Fed will raise interest rates by another 25 basis points to cap off a fourth and final rate hike for 2018.
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