The ability to quickly take a position has proved to be one of the most attractive features of exchange traded funds (ETFs). As a result, fixed income ETFs provide an efficient vehicle to adjust duration and credit exposure.
For example, investors looking to prepare for rising rates may want to seek to lower portfolio duration. There are numerous low-cost ETFs tracking indices that measure the performance of delimited maturity segments of government and corporate bond markets, such as 0-1 or 1-3 years. A reallocation of a portion of the capital to an ETF providing exposure to the 0-1 year maturity bracket would reduce portfolio duration and the downside to bond prices in the event of rising rates. Maturity-segmented ETFs can be used to tilt the duration of a portfolio and also allow for multiple duration combinations to suit specific risk and return objectives.
A Wide Range of Fixed Income ETFs
The fixed income ETF market, which was launched in 2002, is still relatively young. Globally fixed income ETFs have grown notably since and currently comprise 10.2% of the global fund market with USD$800 billion in assets.2 The wide range of fixed income ETFs available means that investors can overlay their portfolio, making subtle moves in duration, credit quality, or currency exposure easily.
Investors also use ETFs to fine-tune asset allocations to adapt to changing markets. This strategy is known as tactical asset allocation, and it can provide investors with flexibility and short term planning within a long term strategy.