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"Bonds Are Back": ETF Strategies to Follow

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Investors are finding value in bonds for the first time in a decade as higher interest rates make fixed-income lucrative, according to JPMorgan Chase & Co.’s Bob Michele, as quoted on Bloomberg. Yields on the benchmark Bloomberg bond aggregate index have jumped to 4.7% from 1.75% at the end of 2021 as the Federal Reserve has been hiking rates to tame inflation.

“Every wealth-management platform in JPMorgan, every institutional client -- they’re coming to us, they’re putting money in bonds,” Michele told host David Westin. “Bonds are back.” iShares 1-3 Year Treasury Bond ETF (SHY - Free Report) is off 5.2% this year while the S&P 500 has lost about 17.2%.

For the bond-lovers, below we highlight a few ETF strategies that could be winning ones.

High-Yield Interest-Hedged ETFs

High-yield interest-hedged ETFs take care of rising rate risks while providing solid current income. This ETF has proven to be pretty resilient in this year’s turmoil.

ProShares High Yield-Interest Rate Hedged ETF (HYHG - Free Report) is comprised of long positions in USD-denominated high yield corporate bonds and short positions in U.S. Treasury notes or bonds of approximate equivalent duration. The ETF yields 5.21% annually and is down 4.9% this year.

Convertible Bond ETFs

Convertible bonds are those that can be exchanged if the holder chooses to, for a specific number of preferred or common shares if the company's share price climbs past a said conversion price during the bond's tenure. The main difference of the asset with the traditional bonds is that convertible bonds offer investors the right to convert their bond holdings into a company’s shares at the holder’s discretion.

First Trust SSI Strategic Convertible Securities ETF (FCVT - Free Report) puts at least 80% of its net assets in a diversified portfolio of U.S. and non-U.S. convertible securities. It yields 4.31% annually and charges 95 bps in fees. FCVT has lost 5.8% in the past three months.

Senior Loan ETFs

Senior loans are floating rate instruments and provide protection from rising interest rates. In a nutshell, a relatively high-yield opportunity coupled with protection from the looming rise in interest rates should help the fund to perform better.

Highland/iBoxx Senior Loan ETF could thus be a good pick for the upcoming plays. It yields around 4.46% annually and charges 56 bps in fees. SNLN is down 2.4% this year.

TIPS ETFs

TIPS are government bonds whose face value rises with inflation. TIPS ETFs not only combat increasing prices but also protect income for the long term.

iShares 0-5 Year TIPS Bond ETF (STIP - Free Report) yields 6.39% annually and is down 4.4% this year. The fund charges as low as 3 bps in fees.

Floating Rate Bond ETFs

Floating rate notes are investment grade bonds that do not pay a fixed rate to investors but have variable coupon rates that are often tied to an underlying index (such as LIBOR) plus a variable spread depending on the credit risk of issuers. Since the coupons of these bonds are adjusted periodically, they are less sensitive to an increase in rates compared to traditional bonds.

iShares Floating Rate Bond ETF (FLOT - Free Report) has an effective duration of 0.10 years and thus presents minimal interest rate risks.

Short-Term Cash-Like ETFs

Investors might want to retain money amid the uncertainty. We believe cash and short-dated fixed income may play a greater role in adding stability to a portfolio.

PIMCO Enhanced Short Maturity Active ETF (MINT - Free Report) may be appropriate for non-immediate cash allocations. The fund charges 35 bps, yields 1.38% annually and has lost 3% this year.


 

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