The Federal Reserve cut interest rates by another quarter point this month, with another anticipated rate cut next month. However, looking beyond to 2025, much remains uncertain, particularly surrounding inflation and rate cuts. Short-duration bonds make sense in such an environment, offering reduced duration risk should interest rate cuts remain difficult to predict.
The volatility and uncertainty of the last few years left many investors hedged in cash and cash alternatives. Now, with interest rate cuts underway, bonds appear increasingly appealing as money market and CD yields retreat. However, concerns over the ballooning Federal deficit, impact of policy changes next year, and general uncertainty create a challenged outlook for longer-duration bonds.
“Price volatility, which has generally centered on shorter maturities, could rise for longer bonds given crosscurrents tied to deficits, taxes, the term premium and Fed balance sheet,” Neuberger Berman wrote in a recent paper.
In such an environment, the Neuberger Berman Short Duration Income ETF (NBSD ) is worth consideration. The actively managed fund seeks to generate reliable income while providing an investment-grade, short-duration profile for portfolios.
The fund currently offers a 30-day SEC yield of 5.66% and a distribution rate of 5.66% as of November 13, 2024. Distribution rate annualizes the most recent distribution and then divides by the most recent NAV. Over the same period, the average duration of the fund was 1.87 years.
The fund invests across a variety of sectors and bond types, including fixed- and floating-rate investment-grade bonds, both foreign and domestic. These can include asset- and mortgage-backed securities, collateralized debt obligations (including CLOs), and credit risk transfer securities.
The management team considers both qualitative and quantitative factors when selecting securities. They search for underpriced bonds, both on a sector level as well as within peer groups. While 80% of the fund is comprised of investment-grade bonds, up to 20% may be below investment-grade. When investing in these junk bonds, the fund managers seek issuers in relatively strong financial health and whose credit scores may be increased.
The strategy also works to reduce credit risk through its diversified exposures.
NBSD carries an expense ratio of 0.35%.
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