In the first half of 2024, fixed income ETFs represented 29% of the U.S. industry’s flows. This is encouraging as the asset category represents just 18% of the asset base. Fixed income ETFs are helping advisors and end clients tilt their portfolios to reflect the rewards they are seeking and risks they are willing to take on.
In late June, VettaFi hosted a Mid-Year Market Outlook Symposium. We covered a range of investment styles and heard from industry experts. VettaFi also asked advisor attendees lots of questions that offered great insights. For example, we asked “which best describes your fixed income exposure heading into the second half of 2024 vs. the Aggregate index?”
Where Are Advisors Comfortable Taking on Risk in Fixed Income?
No answer dominated, with 33% of respondents “taking on more credit and duration risk” and 28% “taking on more credit risk but less duration”. Even those taking on less credit but willing to take on duration risk were reasonably well represented (16%).
We want to offer examples of index-based ETFs to fit the above goals. However, first let’s review what investors get with the aggregate index when investing in the iShares Core U.S. Aggregate Bond ETF (AGG ).
AGG holds more than 11,000 intermediate-term investment-grade bonds. The ETF’s effective duration was recently 6.0 years. The majority of AGG’s assets are invested in U.S. Treasuries and agency bonds. As of mid-July, 72% of the assets were in AA-rated bonds, while just 25% in bonds were rated A or BBB.
Taking on More Credit and Duration Risk
Last week, we talked about how advisors were particularly interested in investment-grade corporate bonds. The iShares iBoxx $ Investment Grade Corporate Bond ETF (LQD ) is one of the largest ETFs focused on the investment style. LQD had 45% of its assets invested in BBB bonds and had an average duration of 8.3 years.
For those wanting to take on even more interest rate risk, the Vanguard Long-Term Corporate Bond ETF (VCLT ) could be appealing. VCLT’s average duration was recently 13 years and the fund had also had 45% of assets in BBB rated bonds. For those wanting even more credit risk but some interest rate risk, the Invesco BulletShares 2034 Corporate Bond ETF (BSCY ) is notable. It owns high-yield bonds and has a duration of over 7 years.
Taking on More Credit but Less Duration Risk
It might be a surprise, but high yield corporate bond ETFs generally have less interest rate sensitivity than AGG. For example, the SPDR Bloomberg High Yield Bond ETF (JNK ) had an average duration of 3.1 years. The fund’s 7.5% yield stems from owning 48% and 38% of assets, respectively, in BB- and B-rated speculative rated bonds.
Other advisors have recently turned to ETFs owning CLOs. For example, the Panagram BBB-B CLO ETF (CLOZ ) has $420 million in assets. As its name suggests, CLOZ invests in BBB and speculative-grade bonds. These bonds are floating-rate assets with very low duration risk (less than one year).
Taking on Less Credit Risk
Even with 72% of assets in AA-rated bonds for the AGG, ETFs investors that want higher credit quality have choices. For those wanting to take on less duration as well, short-term and floating rate Treasury bond ETFs make sense.
The Schwab Short-Term US Treasury ETF (SCHO ) and the WisdomTree Floating Rate Treasury ETF (USFR ) have yields of 4.7% and 5.3%, respectively. Meanwhile, the iShares 20+ Year Treasury Bond ETF (TLT ) has a yield of 4.4% but duration of 17 years. TLT might appeal to those wanting to take on duration risk but not credit risk.
VettaFi will be hosting a fixed income symposium on July 25 covering a range of these investment styles. I hope you will register and join us.
For more news, information, and analysis, visit VettaFi | ETFDB.
This article was prepared as part of WisdomTree’s general paid sponsorship of VettaFi | ETF Trends. This specific content within and any opinions expressed therein belong solely to VettaFi and do not reflect the opinion or analysis of WisdomTree, its employees, or its affiliates. Content published on VettaFi | ETF Trends is provided for educational purposes only and should not be considered investment or tax advice. For investment or tax advice, please consult a financial professional.
