Many fixed-income investors are concerned about the Federal Reserve’s tighter monetary policy with interest rate hikes during the end of a traditional economic cycle. Consequently, more are looking into short-duration bond exchange traded funds to limit risks and still produce attractive yields.
“Play the short game in bonds. What that means is understand your maturity profile within the short-duration space. So think about one- to three-year corporates – their duration profile is much more beneficial than one to five year since you are cutting out the four, five year bucket that isn’t really paying much,” Matt Bartolini, Head of SPDR Americas Research at State Street Global Advisors, said at the Charles Schwab IMPACT 2018 conference.
For example, the SPDR Portfolio Intermediate Term Corporate Bond ETF (NYSEArca: SPIB) shows a 4.22 year adjusted duration and comes with a 3.92% 30-day SEC yield. On the other hand, if investors were to move down the yield curve a little bit, the SPDR Portfolio Short Term Corporate Bond ETF (NYSEArca: SPSB) has a 1.8 year duration and a 3.46% 30-day SEC yield.
Investors who are willing to move down a little more toward the shorter end of the yield curve may find that they are exposed to less interest rate risk as represented by the shorter fund durations, and they are still able to generate attractive yields that are only a few basis points lower than bond funds of a higher duration.
Additionally, Bartolini pointed to floating rate note strategies, such as the SPDR Blmbg Barclays Inv Grd Flt Rt ETF (NYSEArca: FLRN) ,as an alternative for investors worried bout rate risk. Floating rate notes, like the name suggests, have a floating interest rate. Specifically, the notes’ have a so-called reset period with interest rates tied to a benchmark, such as the Fed funds, LIBOR, prime rate or U.S. Treasury bill rate. Due to their short reset periods, these floating rate funds have relatively low rate risk.
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