Fixed-income investors who are worried about today’s rising rate environment can consider lower duration ETF strategies to mitigate the risks.
On the recent webcast, Analyzing Short-Duration Strategies for Rising Rates, Samantha Azzarello, Vice President, Global Market Strategist, J.P. Morgan Asset Management, outlined the current extended bull market, which is entering its late stages with the Federal Reserve embarking on interest rate normalization. Looking ahead, both the FOMC and the market anticipate rising fed fund rates ahead. The FOMC year end estimates a 2.38% rate by the end of 2018 and a 3.13% rate by the end of 2019 while the market projects a 2.26% rate by the end of 2018 and a 2.83% by 2019.
As rates rise, traditional fixed-income exposures have become more risky and investors are not receiving the right remuneration for this higher risk exposure. Azzarello pointed out that the benchmark Bloomberg Barclays U.S. Aggregate Bond Index showed a 3.46% yield and a 6.0 year duration ended September 2018, compared to the benchmark’s average 5.11% yield and a 4.8 year duration.
Alternatively, AJ Nobile, Vice President, Investment Specialist, J.P. Morgan Asset Management, argued that something like the actively managed JPMorgan Ultra-Short Income ETF (JPST) can help investors move down the yield curve to diminish rate risk while but still generate attractive yields.
JPST is an ultra-short duration solution managed on the Global Liquidity platform, which includes a team with 20 years of experience in the field that has access to proprietary technology systems to build and monitor fixed income investments.
Nobile suggested that JPST can be used as a core complement strategy to diminish traditional fixed-income volatility. The ultra-short-duration bond ETF provides more attractive yield generation compared to money market funds, along with exposure to lower duration to limit rate risk compared to later-dated bond funds. Specifically, JPST has a 47 basis point hier yield than the JPM Prime Money Market Fund. The ETF also captures 75% of the benchmark Barclays Agg’s yield with only 8% of the duration. JPST shows a 2.71% 30-day SEC yield and 0.53 year duration.
Potential bond ETF investors who are interested in JPST should consider some factors before placing a trade. Ryan Szakacs, Vice President, ETF Capital Markets, J.P. Morgan Asset Management, warned investors that markets can be more volatile near the open and close of trading, so one should consider trading after the first, and before the last, 15 minutes of the trading day. He also advised investors to use “Not held or Limit orders” when secondary market liquidity is a concern since market orders can move markets in less liquid securities.
Financial advisors who are interested in learning more about the fixed-income markets can watch the webcast here on demand..