Despite looming worries over a bond bubble, investors continue
to pile into fixed income products. The space has seen an
impressive amount of inflows in the past few months, and with
equity market weakness as of late, this trend could definitely
continue.
Yet the specter of rising interest rates is always hanging
over the market, threatening to eventually crush those who have
bought long-dated bond investments. When rates eventually move
higher, those who took on risk for yield could be in for a world
of pain as bond prices collapse in order to readjust to a new
reality (read
Three Bond ETFs for a Fixed Income Bear
Market
).
Although with how uncertain the equity market has been as of
late, one cannot blame investors for taking on some interest rate
risk for the impressive stability that comes with fixed income
investments. But instead of looking to long dated bonds with
their more impressive payouts, those searching for stability in
the bond market may want to consider low-duration securities for
their exposure.
While these securities do not pay out much in the way of
income, they are unlikely to be hard hit by a sudden spike in
interest rates either, thanks to their low duration approach. Due
to this, these could be better prepared for a move higher in
rates while still offering up solid levels of stability that
investors are probably craving given this uncertain market (read
3 Actively Managed Bond ETFs for Stability and
Income
).
For investors interested in taking this technique, we have
highlighted three of our favorite bond
ETFs
below that minimize interest rate risk and employ a low duration
approach. While the yield or price appreciation for these three
might not be that much, they are likely to be bastions of
stability no matter what happens in the broader equity or fixed
income markets.
iShares Floating Rate Note Fund (
FLOT
)
It is hard to be too hurt by interest rate changes when your
securities have a variable interest rate, much like those that
occupy the holdings list of FLOT. This fund tracks the Barclays
US Floating Rate Note < 5 Years Index, holding about 233 notes
in total (read
Floating Rate Bond ETF Investing 101
).
The 30-Day SEC yield for this product is about two-thirds of a
percent-better than most-due to the fund tracking securities that
pay out a rate equal to LIBOR plus a fixed coupon spread. Still,
the effective duration is just 0.15 years thanks to the resetting
of LIBOR, suggesting that this product will not suffer greatly
from big interest moves either.
SPDR Barclays 1-3 Month T-Bill ETF (
BIL
)
For a Treasury play on low duration securities, BIL fits the
bill. The product hones in on Treasury bonds that mature within
three months, ensuring that the products have next to nothing in
both interest rate risk as well as default risk.
As a result, the yield is pretty much zero percent although
the average maturity is just 0.13 years while the annualized
volatility is just 0.02. Clearly, this fund will be tough to beat
for investors looking for bond stability without some of the
interest rate worries that we are seeing in other corners of the
market.
PowerShares VRDO Tax-Free weekly Portfolio (
PVI
)
If investors prefer a municipal bond approach, PVI is an
interesting choice with an extremely low duration. The fund seeks
to match the Bloomberg US Municipal AMT-Free Weekly VRDO Index, a
benchmark that zeroes in on Variable Rate Demand Obligation notes
which have interest rates that are reset on a weekly basis (read
VRDO Municipal Bond ETF Showdown: VRD vs. PVI
).
This weekly reset ensures that the effective duration is next
to nothing despite the fund having an average years to maturity
of just under 20 years. The fund has 40 securities in its basket
and a fee of 25 basis points a year, although once again the
yield is pretty much zero.
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SPDR-BC 1-3M T (BIL): ETF Research Reports
ISHARS-FL RT NT (FLOT): ETF Research Reports
PWRSH-VRDO TAXF (PVI): ETF Research Reports
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