Indexed Fixed Income Is Making Inroads in the Bond Space

An active management style gives bond investors a more dynamic solution for their portfolios, but a recent State Street Global Advisors (SSGA) report has pointed to the sustained move toward indexed funds.

According to the SSGA report, active management is still the dominant strategy in the fixed income arena. However, survey data shows that times are changing.

“Survey respondents confirm that active management of fixed income strategies still predominates, which translates to both a challenge and an opportunity for indexing in an evolving FI market,” the report said. “More than three-quarters (76%) of respondents have less than 30% of their fixed income portfolio allocated to index strategies. Despite this relatively low base of indexed fixed income adoption, survey respondents indicate that they are preparing for substantial change — because indexed FI is now a clear future priority.”

That change has been evident in the survey results, with global respondents shifting toward indexed funds.

“66% of global respondents are prioritizing increased use of indexing for broad or liquid, core FI exposures over the next three years (in Australia the percentage was 82%;in North America it was 71%),” the report added. “63% of global respondents are prioritizing increased use of indexing for less liquid, non-core/satellite FI exposures over the next three years.”

A High-Yield Option with a Value Component

As the move towards indexing continues, one high-yield ETF option is the FlexShares High Yield Value-Scored Bond Index Fund (HYGV). HYGV seeks investment results that correspond generally to the price and yield performance of the Northern Trust High Yield Value-Scored US Corporate Bond Index, which reflects the performance of a broad universe of U.S.-dollar denominated high yield corporate bonds that seeks a higher total return than the overall high yield corporate bond market, as represented by the Northern Trust High Yield US Corporate Bond Index.

Navigating the vast array of high-yield debt requires discerning analysis. With a multi-factor approach that seeks out quality-focused debt, HYGV comes with a low expense ratio of 0.37%, which is nine basis points below the fund’s category average.

“NTI’s liquidity screen is a multi-metric assessment of liquidity that incorporates such characteristics as time to maturity (e.g. time until the security reaches its maturity date as measured in years), total issuer debt outstanding (e.g. the sum of all debt outstanding for a single corporate issuer), and time since original issuance (e.g. the time that has elapsed since the security was originally issued as measured in years),” said FlexShares.

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