Is now the time for short duration bonds? It very well may be. With global uncertainty rising, shorter-term debt could provide a meaningful degree of risk reduction. At the same time, short duration also still plays that helpful role of adding yield and some ballast to equity volatility. Getting the most out of the category, however, may require a broader shift in perspective. Indeed, for many investors, active investing could appeal as a way to adapt to uncertainty and search for short duration upside.
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Where passive funds often struggle to replicate their indexes, active funds can do a better job. When a passive strategy aims to hold, for example, a 30% allocation to short duration bonds, common issues, like bonds being called early or defaulting, make it harder to maintain that allocation. An active fund, by contrast, can respond more quickly to those common fluctuations in fixed income to hew closer to a given target allocation.
Short Duration Bonds in an Active ETF
Not only do active funds offer that important adaptability to stick to a target, but they can also offer potential outperformance. Active managers can bring close scrutiny to bond issuers, identifying those firms less likely, for example, to face default.
For short duration bonds, for example, the American Century Short Duration Strategic Income ETF (SDSI ) can present an option. The active ETF invests in short duration fixed income options of any credit quality. Charging 33 basis points, the fund invests in a variety of fixed income offerings including bank loans, collateralized debt obligations, agency debt, and more. It aims for a weighted average duration of three years or shorter. In addition, SDSI may use derivatives, such as swaps, to add income.
“We are often asked by clients where the sweet spot is in fixed income today,” said American Century Investments Director of Corporate Credit Research, Vice President, and senior portfolio manager Jason Greenblath.
“We believe the front end of the curve is a place to consider,” he added. “SDSI is structured as a multi-sector, short duration strategy designed to capture both income and total return. Through our active asset allocation and security selection, we believe the fund is capturing the sweet spot in fixed income.”
The short duration bonds ETF has returned 5.68% over one year, according to American Century Investments data. That data was as of January 31. What’s more, SDSI offered a 5.3% weighted average coupon as of January 31, as well. For those looking at short duration bonds, SDSI may provide a compelling option.
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