Bond markets have been hit with sustained volatility, making them just as unreliable for generating returns as equity markets this year. With inflation still at a record high and the Federal Reserve continuing to aggressively raise interest rates, this volatility doesn’t appear to be going anywhere anytime soon.
Columbia Threadneedle’s head of multi-asset strategy Anwiti Bahuguna told Bloomberg that “bond market volatility will stay elevated for the next six to 12 months,” adding that the Fed could ease up on its rate hikes next year only to resume if the economy is stronger than expected.
According to Sandra Testani, vice president of ETF product and strategy for American Century Investments, the fund manager thinks “that a recession is likely for the U.S. and Europe,” and that she expects inflation “to fall going forward… but not go back to pre-COVID levels anytime soon.”
“There’s also a solid chance of stagflation for the future,” she added.
As a result, Testani said she is seeing a preference among investors for credit funds “that have the potential to offer inflation protection or out yield inflation.”
“In fixed income, there’s a preference for higher quality over high yield, and short- and ultra-short duration over long-term assets,” she said.
For fixed income investors seeking higher quality, shorter duration options for their portfolios, there’s the Avantis Short-Term Fixed Income ETF (AVSF ) and the American Century Short Duration Strategic Income ETF (SDSI ).
AVSF invests primarily in investment-grade quality debt obligations from a diverse group of U.S. and non-U.S. issuers with shorter maturities. The fund’s portfolio managers seek bonds with high expected returns through a process that uses an analytical framework, which includes an assessment of each bond’s expected income and capital appreciation.
AVSF, which carries an expense ratio of 0.15%, aims for a three-year average maturity.
Meanwhile, the newly launched SDSI seeks income and, as a secondary objective, long-term capital appreciation. The strategy will seek to generate attractive yield by investing across multiple fixed income market segments, which maintain a short duration focus.
The fund invests in both investment-grade and high-yield, non-money market debt securities. These securities may include corporate bonds and notes, government securities, and securities backed by mortgages or other assets.
SDSI is a transparent active ETF with holdings disclosed daily and an expense ratio of 0.32%.
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