How to Use Active Bond ETFs to Help Preserve Downside Protection

“We’re right now in an era of transitory turbulence. We have monetary policy which is potentially reaching an end. We have a neutral rates that seem within grasp, at least for the U.S. economy. At the same time, there’s a general veil of uncertainty with the markets,” Jerome Schneider, Managing Director, Head of Short-Term Portfolio Management and Funding at PIMCO, said at Inside ETFs.

Consequently, investors may not find it harder to rely upon passive index-based bond funds, especially considering benchmarks like the Bloomberg Barclays U.S. Aggregate Bond Index now come with lower yields and higher duration, exposing investors to greater risks with lower payouts.

“When you take into account that the uncertainty is continuing to percolate, ultimately, just taking the beta, taking the index, becomes a little bit more of a daunting task. You want to be focusing on differentiating and taking credit risks, taking structural risks and taking interest rate risks, which allow you to articulate and move and jostle as actually opportunities expose themselves along the way. Not just assuming the ride, which could be quite bumpy, for the next few years,” Schneider added.

Investors can look to actively managed bond ETFs in this changing market environment. For example, the PIMCO Active Bond ETF (BOND B) is one of the largest actively managed exchange traded funds and the management style could serve fixed income investors well.

Beyond a fixed-income core holding like BOND, fixed-income investors can also supplement with less rate sensitive strategies like the PIMCO Low Duration Active ETF (LDUR B).

Additionally, the PIMCO Enhanced Short Maturity Active ETF (MINT A) can provide additional yield beyond cash. MINT is meant to be used as an incremental step outside of the money market funds.

For more ETF-related commentary from Tom Lydon and other industry experts, visit our video category on ETF Trends.