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When managing a fixed income portfolio, there are two primary risk factors that financial advisors consider: credit risk and interest rate risk. The superstar bond fund managers of the world have set themselves apart by a superior ability to identify these risk components–and then select securities that offer superior risk-adjusted returns [see also Better-Than-AGG Total Bond Market Portfolio].

The first risk factor is easy enough to understand; the more likely an issuer of debt is to default and leave bondholders with nothing, the greater the return that will be demanded by those lending money. Companies and countries with stellar credit ratings and strong cash flow profiles can borrow funds at relatively low rates of interest, while more speculative issuers will have ot pay significantly more in interest to compensate for the additional credit risk. Disparities in credit risk explain why Wells Fargo can issue debt with a 3.75% coupon, while less stable companies such as First Data are issuing debt with coupons of about 12.6%. Many fixed income managers devote significant portions of time attempting to identify disparities between the interest companies are paying on debt and their actual credit risk; figuring out a disconnect can result in an opportunity to generate alpha.

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The ETF industry slowed down its pace in March, showing moderate levels of activity on the product development front. After a busy February, this month saw the debut of only 14 new funds; however, investors were introduced to two new first-to-market products, including an emerging market corporate bond fund as well as an ETF that offers targeted exposure to Indonesian small cap companies. Additionally, markets welcomed the highly anticipated Total Return ETF from PIMCO and its legendary bond guru, Bill Gross [for updates on all new ETFs, sign up for the free ETFdb newsletter]:

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Guggenheim, a pioneer in the area of target date fixed income products, has responded to strong interest in its BulletShares product lineup with the launch of three more products targeting investment grade corporate debt maturing in a specific year. The recent addition, which took effect last week, extends the existing product lineup by three years, […]

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