Lara Crigger, editor-in-chief at VettaFi, recently appeared on TD Ameritrade to discuss the recent Fed meeting that saw a 0.75% interest rate increase and what to anticipate in markets in both the short and long term with host Nicole Petallides.
“I think we’re going to see markets continue to whipsaw for a while as investors process yesterday’s rate hike,” Crigger said.
Bonds experienced enormous amounts of trading volume in the days leading up to the meeting, with Monday’s bond trading volume more than twice its average daily trading volume as investors moved money on rate hike fears.
Looking ahead, Crigger believes that fixed income will benefit in the long term from rising rates, “but there’s going to be some short-term pain.”
So what does it mean for investors? Shorter-duration bonds and short-duration bond ETFs offer less interest rate risk exposure than their longer-term peers and will retain their value during the continued volatility in markets — driven in part by an aggressive Fed that has made clear that it will bring down inflation, even at the cost of recession.
Crigger has two pieces of advice for advisors to tell their clients, and for investors in general: “shorten up on duration” in both bonds and equities, and also to consider funds with active management because of the flexibility they can offer in choppy markets particularly.
“At VettaFi, we’re seeing a significant uptick in research around ultra-short-duration bond ETFs — right move in my opinion. Ultra-short helps you play defense against these big rate moves,” Crigger said.
An ETF that falls within this category is the T. Rowe Price Ultra Short-Term Bond ETF (TBUX ), which offers the combination of both active management and short duration across sectors, including foreign debt, bank loans, municipal bonds, and others that tend to perform better in the current environment.
“That flexibility has mattered in this market. Both in the last month and year-to-date, TBUX has been outperforming its category average by a factor of about two,” Crigger explained. “Plus, it’s only 17 basis points, and that’s on the cheap side for a fixed income ETF, especially an actively managed one.”
Volatility is likely to continue for markets as long as the Fed is raising rates, Crigger believes, creating a painful and challenging environment for investors. Knowing that Fed rates are still coming, however, should allow for advisors and investors to better position their portfolios accordingly into strategies such as active management and ultra-short duration.
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