In real estate, it’s location, location, location. In bond portfolios, it’s duration, duration, duration.
With the onset of defined maturity or “target date” ETFs, investors now have the ability to tweak their portfolios to their liking. Muni , taxable and high yield offerings are now available in the market place, enabling investors to essentially “ladder “ their portfolios with ETFs that will “mature” in different time frames or years (i.e. 2014, 2015, etc.) Essentially, target date ETFs are a re-branding of fixed income unit trusts that existed years ago in the marketplace. Just as many “managed” ETFs rebranded themselves from their former name as closed end funds.
Currently, the yield curve offers very little reward for short-term returns. Investors have an appetite for yield but also realize that the interest rate and duration risk of longer maturities could give them indigestion.
“Barbelling” a portfolio worked for many years where there was a balance between the short-end of the curve on the left side of the barbell and longer maturities invested on the right side. When the investor “lifted” the barbell over their head, there was balance between both ends, making it easier to hold. Now, investors have started to skew the left side, or shorter end of the curve in their barbell, making many investors feel uncomfortable with the lack of balance over their head.
Target date ETFs could be a great tool in the future on the short-end of the curve when rates normalize. Duration measures the sensitivity of a bond portfolio to a change in interest rates. However, currently, extra low duration bonds and ETFs offer little more than cash for taxable and muni ETFs. High yield, or junk offerings in ETFs, offer higher reward with commensurate risk. An equally weighted portfolio of corporate target date ETFs in years 2014, 2015 and 2016 had a duration of just under 2 years and a mean yield of under 1%. Since many retail investors and endowments “eat their cash flow”, this strategy would still leave them hungry. Since target date ETFs “mature”, cash accumulates as bonds mature. In this interest rate environment, investors might be better served looking at the near-zero rate of return in cash or possibly utilizing ultra-short maturity ETFs, even though the latter should not be viewed as a cash alternative.
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