Fixed Income ETF and Relative Value Strategies
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Fixed Income ETF and Relative Value Strategies

Fixed Income ETF Strategies

The diversity of the fixed income markets lends itself to a wide range of investment strategy applications for bond investors. Building multi-sector fixed income portfolios (for example including a mix of Treasuries, corporates, municipals, and securitized bonds) allow for diversification of both risk and return sources and a portfolio that more closely resembles the composition of the broad bond market.

Given their liquidity, transparency, and high degree of modularity, fixed income ETFs can form the "building blocks" of a variety of fixed income investing strategies. Investors can use fixed income ETFs to express views on the economy or interest rates, to capture relative value across bond market sectors or, more strategically, to build out the core of a balanced equity/fixed income portfolio in a low-cost, tax efficient manner.

Relative Value Strategies

Investors can tilt their portfolios tactically to different sectors of the bond market to take advantage of relative value opportunities resulting from different market and economic conditions. For example, in 1999, amid rising interest rates, a growing economy and tightening credit spreads, shorter-duration portfolios with an overweighting in corporate bonds tended to outperform all-government portfolios. Allocations to real return bonds also helped counter the effects of rising rates. Investors who adjusted their portfolios to tilt toward these sectors had opportunities to earn additional return.

Even within sectors there can be opportunities for relative value plays. Investment grade and high yield corporates are a good example of this. In an environment of credit spread tightening, for example, investors could tilt their portfolio more heavily toward high yield and reduce allocations to investment grade corporate bonds. Using ETFs, an investor can execute tactical sector rotations easily and efficiently, adding or removing broad exposure to a specific bond market sector in a single trade.

*Source: Bloomberg and Federal Reserve