SPSB invests at least 80 percent of its total assets in securities designed to measure the performance of the short-termed U.S. corporate bond market. Ideally, shorter-term bond issues with maturities of three to four years are ideal to minimize duration exposure should the bull market enter a correction phase.
“To mitigate the impact of rising short-term rates, investors can consider targeting specific duration profiles,” said Bartolini. “In the past year, targeting the 1-3 year corporate maturity band vs. the 1-5 year band would have delivered 60 basis points of outperformance. Yields are comparable (3.31% vs. 3.41%), but the 1-3 year space has almost one year less of duration.”
2. Focus on Floating Rate Structures
A floating rate component that moves in conjunction with rate hikes will be beneficial if the Fed continues to remain hawkish on the economy. As such, Bartolini recommends the SPDR Blmbg Barclays Inv Grd Flt Rt ETF (NYSEArca: FLRN), which seeks to provide investment results that correlate with the price and yield performance of the Bloomberg Barclays U.S. Dollar Floating Rate Note < 5 Years Index.
“Floating rate notes with coupons that adjust to movements in LIBOR may be a more optimal solution to mitigate duration-induced price declines,” said Bartolini. “Since 2003, in months where the US 2-year yield has increased, a floating rate note exposure has outperformed a fixed rate exposure with the same maturity band by an average of 0.25% to 0.07%. The floating rate note exposure also had positive returns in 90% of those months vs. 52% for fixed rate. Floating rate notes tethered to LIBOR can also provide income as yields sit north of 2.6% following LIBOR’s 132% increase since 2016.”
In addition, Bartolini suggests investors take a look at senior loan options like the SPDR Blackstone / GSO Senior Loan ETF (NYSEArca: SRLN) as an alternative to high yields should they come under pressure as the Fed continues to increase rates. SRLN seeks to provide current income consistent with the preservation of capital through investing in the Blackstone / GSO Senior Loan Portfolio.
“If growth were to slow as the Fed hikes rates, high yield valuations might come under pressure, leading to spread widening,” Bartolini said. “Defensively positioning credit-oriented high yield portfolios while earning yield may be ideal. Senior loans are higher in the capital structure and have historically withstood spread widening better than fixed rate high yield, outperforming by an average 0.59% when credit spreads widen. Loans are also floating rate and will likely see coupons rise along with Fed hikes.”
3. Go Active in the Core
Lastly, Bartolini suggests using actively-managed options like the SPDR DoubleLine Shrt Term TR Tact ETF (BATS: STOT). STOT seeks to maximize current income with a dollar-weighted average effective duration between one and three years.
“Active security selection across a wide range of security types, regardless of their listed maturity date, may balance a portfolio between credit and interest rate-sensitive sectors while providing an attractive yield and duration profile,” said Bartolini. “Actively combining different credit and interest rate sensitive sectors may strike a better balance of yield and risk than traditional core or short-term core indexed approaches.”
For more real estate trends, visit ETFTrends.com