Looking ahead, Glownia outlined Riverfront’s current udernweight allocation to U.S. fixed-income, with a preference for credit over duration risk, or investment-grade corporate debt. The firm believes strong corporate earnings and balance sheets, the ability of companies to refinance at historically low rates, and income advantage relative to U.S. government debt are all attractive attributes. Beyond corporates, Glownia believes investors may find opportunity in short-duration high yield and levered loans due to the asset categories’ income advantage and low credit risk in a strengthening economy.
“With the Fed on track to continue gradual rate hikes, the yield curve may continue to flatten as short term rates rise in response. Consider shortening duration to mitigate price volatility without sacrificing yield potential. Floating rate structures may allow investors to harness the benefits of movements on the short end of the curve,” Bartolini said.
For example, the SPDR Barclays Investment Grade Floating Rate (NYSEArca: FLRN) can help hedge interest rate risks. The ETF follows the Bloomberg Barclays U.S. Dollar Floating Rate Note < 5 Years Index, which seeks to provide exposure to debt instruments that pay a variable coupon rate, a majority of which are based on the 3-month LIBOR, with a fixed spread. 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.
Investors could also complement existing credit positions in high-yield and investment-grade credit with alternatives like bank loans that access floating rate, move up the capital structure and shortens duration exposure. For example, the actively managed SPDR Blackstone/GSO Senior Loan ETF (NYSEArca: SRLN) could help investors with better exposure as a manager is more freely able to weave in and out of the fixed-income market.
The SPDR Portfolio Short Term Corp Bond ETF (NYSEArca: SPSB) provides exposure to the shorter end of the investment-grade corporate debt market. The fund seeks to provide investment results try to reflect the Bloomberg Barclays U.S. 1-3 Year Corporate Bond Index.
Additionally, the actively managed SPDR DoubleLine Short Duration Total Return Tactical ETF (Cboe: STOT) seeks to maximize current income with a dollar- weighted average effective duration between one and three years. The fund seeks to maximize total return over a full market cycle through active sector and security selection across a broad range of fixed income securities that could include, among others, securities issued or guaranteed by the US government, foreign and domestic corporate bonds, emerging market bonds and agency and non-agency mortgage backed securities.
Financial advisors who are interested in learning more about fixed-income investment strategies can watch the webcast here on demand..