Smart Beta Fixed Income Options to Consider as Yields Free Fall

Treasury yields continued their free fall on Monday as the 10-year yield went down to 1.64 percent on Monday and came less than 6 basis points higher than the 2-year yield to once again, spook investors with an inverted yield curve–a recession indicator. As such, it’s forcing bond investors to take a closer look at smart beta when it comes to yield-hunting in fixed income markets.

The sky continues to fall on safe-haven government debt yields yield as the benchmark yields like the 10-year Treasury note have fallen below 2 percent.

“It’s the whole idea that the Fed is making a mistake. There’s more fear that the Fed is going to be slow in making moves, and the economy is going to to into recession,” said Andrew Brenner, National Alliance head of international fixed income.

“People express their shorter-term market opinions in the 10-years or less. The next question is how long does it stay that way,” said Peter Boockvar, chief investment officer at Bleakley Advisory Group.. “I still think the rest of the curve is saying a lot, and it stayed inverted for more than a month.”

The default maneuver in today’s volatile markets is seeking safe-haven assets, such as bonds. Investors looking to gain broad-based exposure to bonds can look at funds like the ProShares S&P 500 Bond ETF (NYSEArca: SPXB). The fund seeks investment results that track the performance of the S&P 500®/MarketAxess Investment Grade Corporate Bond Index, which consists exclusively of investment grade bonds issued by companies in the S&P 500.

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.

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