The Federal Reserve dropping interest rates to historic lows is making life difficult on advisors allocating to fixed income asset and their income-starved clients.
The WisdomTree’s Fixed Income Model Portfolio, which is part of the issuer’s broader series of Modern Alpha Model Portfolios, can help advisors navigate some of the pitfalls of 2020’s bond market.
“This model portfolio is focused on a diversified stream of income. It seeks to benefit from secular trends we see evolving in the fixed income markets in a risk-conscious manner,” according to WisdomTree. “The model portfolio focuses on select opportunities in core sectors, while strategically allocating among sectors and extending the model portfolio’s reach globally.”
Eight fixed income exchange traded funds from three issuers, including WisdomTree, comprise this model portfolio.
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Last week’s jobs report and other commotion in the nation’s capitol underscore the utility of the WisdomTree Fixed Income Model Portfolio over the near- to medium-term.
“Jobs Day last Friday was the final such report before the election. However, given the headlines surrounding President Trump and the First Lady’s COVID-19 diagnoses and the ongoing specter of a potential fiscal stimulus package, this month’s employment data has flown a bit under the radar and had little, if any, immediate impact on the bond market,” writes WisdomTree head of fixed income strategy Kevin Flanagan in a recent note.
A few years ago, interest rates had been rising steadily and the belly of the yield curve was significantly underperforming. If an investor was in an intermediate term fund, they would have been lagging the market for over a year, but if they had incorporated a bond ladder holding short, intermediate and longer maturity bonds, they could have been less impacted by the uneven movement of interest rates.
Looking ahead, Federal Reserve has shown its intent to buy more bond-related ETFs to support liquidity in the fixed-income market after the announcement in March of its intent to enter the market sparked record inflows.
With Election Day just weeks away, Flanagan advises against bond market timing.
“Our base case does look for the UST 10-year yield to rise back over 1% and the yield curve to steepen. In the meantime, any uncertainty over the election results, like we saw in Bush vs. Gore in 2000, could create a risk-off period that could actually push UST 10-year yields lower until a final outcome is known,” he writes.