Tariffs and interest rates are major contributors to the wall of worry for investors. It’s not just affecting the equities market, it’s affecting fixed income. However, a short-term fixed income strategy could be what investors need to consider in today’s uncertainty.
Tariff wars and interest rates aren’t necessarily mutually exclusive market activators. Both can work in tandem, and in the case of tariffs, they could have a profound influence on interest rates.
“There’s any number of directions tariff rates could go—a small increase, a big increase, no increase—from here forward,” a Morningstar article said regarding interest rates. “And depending on that, there’s a lot of different directions that monetary policy could go.”
Given the uncertainty surrounding interest rate policy, this makes short-term bond funds the continuing default play for fixed income investors. Because they are less prone to interest rate sensitivity, short-term bond funds can mitigate any risk should rates drop, continue to stay flat, or even rise.
“Despite the bond market’s volatility in recent years, short-term bond funds have lived up to their reputation as safe havens, offering investors a low-risk option with consistent long-term returns,” noted Morningstar in a separate article.
“Over the last 12 months, short-term bond funds have returned 6%,” Morningstar added, noting that their annualized performance reveals a return of “3.08% over the last three years and 2.40% over the last five.”
Shorten Duration Actively
Investors looking to get short duration debt exposure may also want to consider getting active exposure. That said, the American Century Short Duration Strategic Income ETF (SDSI ) is worthy of consideration.
SDSI also uses active management to locate and handpick short-term bond holdings to mitigate further rate risk. The strategy will seek to generate attractive yield. It will do so by investing across multiple fixed income market segments, which maintain a short-duration focus.
SDSI is also well-diversified, investing across a broad array of debt. This includes corporate bonds and notes, government securities, and securities backed by mortgages or other assets. As of February 28, a majority of the holdings (29%) reside in investment-grade corporate debt. The rest of the holdings are spread across high yield corporate debt, U.S. government debt, nonagency collateralized mortgage obligations, non-US investment-grade corporates, commercial mortgage-backed securities, and emerging market debt. About 80% of this mix resides in BBB credit quality or better, giving investors a heavier skew toward investment-grade debt.
As mentioned, the active management allows fund managers to maintain pliability in the current fixed income environment. This allows for changes to holdings on the fly if market conditions warrant an adjustment.
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