Falling Yields Should Make Investors Take a Closer Look at Smart Beta

The sky continues to fall on safe-haven government debt yields yield as the benchmark 10-year Treasury note fell below 1.75% on Monday, its lowest level since November 2016 following China retaliation after the latest U.S. tariffs. With yields falling, it’s forcing bond investors to take a closer look at smart beta when it comes to yield-hunting in fixed income markets.

When it comes to fixed income market veterans, some may think that smart beta factors have no place in this space. However, a study performed by asset manager Robeco found that factors like value and momentum are driving higher returns in fixed income portfolios.

Specifically, factors like value, momentum and low risk were applied to selecting government bonds. According to an article in Institutional Investor, all three factors “generated higher risk-adjusted returns than the market.”

What’s preventing the use of factors from getting more attention in the fixed income arena? All signs point to the lack of data.

One of the challenging aspects advisors face with this more cautious investor is the plethora of options available, especially in the ETF space. Where are the opportunities in ETFs given the current market landscape challenged by obstacles such as trade war fears?

One default maneuver is seeking safe-haven assets, such as bonds. However, investors can also get the smart beta strategies via fixed-income ETFs.

The Invesco Multi-Factor Defensive Core Fixed Income ETF (CBOE: IMFD) and the Invesco Multi-Factor Income ETF (CBOE: IMFI) are recent additions to the issuer’s lineup of multi-factor bond ETFs. Both new ETFs track in-house indexes.

IMFI follows the Invesco Multi-Factor Income Index. That benchmark “is designed to provide multi-factor exposure to fixed income securities in the following weights: 25% in mortgage-backed securities, 25% higher-quality US investment grade, 25% high yield, and 25% emerging markets debt,” according to Invesco.

Each of the bond market segments represented in the new ETF has its own criteria for assessing quality and value traits, the factors emphasized by the new ETFs. Last year, Invesco also introduced eight multi-factor bond ETFs that focus on favorable value and quality characteristics.

With outside factors like trade wars seeping into the bond markets, the need for more smart beta exposure simply makes sense.

“Now we have a trade situation that is going off the rails as the side effects multiply due to the ramping up of the use of tariffs and we are only further apart from any resolution with the Chinese,” said Peter Boockvar, chief investment officer at Bleakley Advisory Group. “The policy of using tariffs as a tool to address our legitimate beefs with the Chinese has failed miserably.”

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