The Case for Lowering Duration in Fixed Income ETFs

As of now, it may be for the benefit of investors to keep their bond duration relatively low. Recent insights from Eaton Vance broke down why duration should stay low, despite the recent rate cut from the Fed. 

“We believe 250 bps of rate cuts are already priced in for Fed policy rates to fall toward 3%. Additionally, we believe the yield curve will continue to steepen as the Fed makes progress toward cutting rates,” Eaton Vance added. “The longer-term average spread between Fed funds and the U.S. Treasury (UST) 10-year yield is 75 bps. So, even if the Fed cuts to 3%, as priced, then the UST 10-year may end up around 3.75%.”

While longer-duration bond strategies may be losing their luster, short-duration fixed income ETFs continue to offer competitive yields. One such example is the Eaton Vance Short Duration Income ETF (EVSD B).

EVSD gives investors easy access to a well-diversified portfolio of short-term fixed income securities. This includes a good mix of asset-backed securities, investment-grade credit, mortgage-backed securities, and treasuries, among others.

Across all fixed income sectors, EVSD’s portfolio team blends a top-down and bottom-up investment approach. This gives the fund a more balanced investment perspective as it seeks out ideal yield-generating options in the field. 

The majority of fixed income assets within EVSD’s portfolio have a duration sitting between one and five years. This allows the fund to continue to cultivate competitive yield while avoiding some of the inherent risks with long-term shifts in interest rates. 

EVSD’s returns are offering highly competitive results compared to its benchmark, the Bloomberg 1-5 Year U.S. Credit Index. As of Oct. 8, 2024, EVSD’s market price has jumped 5.55%, while its benchmark has only risen 4.63%. 

For more news, information, and analysis, visit The ETF Yield Channel.