Diversify risk in today’s market with fixed income ETFs


Exchange-traded bond funds still have their place in a portfolio as a diversifier against risk selling pressures, Wall Street indices retreating and tech stocks lagging behind.

The Nasdaq fell as much as 10.37% below its intraday record high on November 22, Reuters reports. The benchmark index was also trading around 9% below its closing high on November 19. To confirm a correction, the index must close 10% or more below its previous record close.

Tech names are taking the brunt of the recent blow as rising interest rate expectations weigh on the growth style.

“Big tech companies should be doing this because the rate hike isn’t really affecting them too much,” Randy Frederick, managing director of trading and derivatives at Charles Schwab, told Reuters. “But, they’re driven by people selling off the unprofitable, heavily leveraged, heavily leveraged new technology companies that have gone public recently, especially those that were SPACs (Special Purpose Acquisition Companies).”

Looking ahead, Frederick predicts that sales of the technology will continue “at least until the next Fed meeting, which is around Jan. 26”.

Low rates have helped fuel a recovery in tech companies as they make bonds less attractive and encourage investors to buy riskier assets. However, as the Federal Reserve turns to fight inflation, tech stocks have lost some of their previous momentum. The outlook for higher rates reduces the value investors see in the future growth or cash flow of these fast growing tech companies.

Investors looking to strengthen their fixed income portfolios may consider the Avantis Core Fixed Income ETF (AVIG), which invests in a wide range of debt securities across all industries, maturities and issuers. AVIG seeks the benefits associated with indexing, such as diversification and transparency of exposures. However, the fund also has the ability to add value by making investment decisions using information embedded in current returns.

the Avantis Short Term Fixed Income ETF (AVSF) Also invests primarily in high quality debt securities from a diverse group of US and non-US issuers with shorter maturities.

Active management American Century Diversified Corporate Bond ETF (NYSEArca: KORP) invests in US dollar denominated corporate debt securities issued by US and foreign entities, but may also hold securities issued by supranational entities. Up to 35% of the fund’s net assets may be invested in high yield securities or junk bonds. The fund may also invest in derivative instruments such as forward contracts and swap agreements. The weighted average portfolio duration of the fund is expected to be between three and seven years.

In addition, active management American Century Multi-Sector Income ETF (MUSI) is designed for investors looking for consistent income in a tax-efficient ETF. The team targets attractive returns throughout the market cycle while providing investors with access to a diverse set of securities opportunities, including investment grade companies, high yield companies, debt markets emerging markets and securitized bonds.

For more news, information and strategies, visit the Core Strategies channel.

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