Credit risk

Diversify your portfolio with high-quality bond ETFs with less credit risk

With inflation persisting, the chances of the Federal Reserve deviating from its aggressive monetary tightening are slim. While the Fed is expected to continue raising interest rates, analysts expect the economy to be heading for a hard landing. Even Fed Chairman Jerome Powell suggested it last month.

As the two-year Treasury yield climbs to 4%, the fixed-income market has signaled that it expects the U.S. central bank to hike rates another 75 basis points at least once more. more.

“The Fed’s resolve reflects central bank concerns about persistently high inflation,” wrote Charles Tan, senior vice president and co-chief investment officer for global fixed income at American Century Investments. “Policymakers have hinted that they will continue to tighten financial conditions in the United States to contain inflation, regardless of short-term negative effects on the economy.”

While inflation is expected to ease over the next few months as the Fed continues its tightening efforts, inflation is still expected to linger and remain above the Fed’s target for some time.

Treasury yields, including the benchmark 10-year yield, hit multi-year highs. However, the market has largely priced in future rate hikes, suggesting that Treasury yields may be approaching their peak. If and when Treasury yields stabilize, high-quality bond volatility should also moderate.

In this volatile environment, investors may consider high-quality bond ETFs with less credit risk to serve as prudent portfolio diversifiers. Some options include the Avantis Core Fixed Income ETF (AVIG) and the Avantis Short Term Bond ETF (AVSF).

AVIG provides active exposure to a wide range of high quality debt securities from US and non-US issuers. Securities may include those issued by companies or governments and their agencies, intermediaries or sponsored companies, including supranational organizations.

AVIG seeks bonds with high expected returns through a process using an analytical framework in which the expected income and capital appreciation of each bond is assessed. Fund managers categorize the portfolio universe into component groups based on industry sector, credit rating, duration, country and currency. Next, the expected return of each group implied by the yield curve is calculated, while taking into account valuation parameters such as yield, duration and option-adjusted spreads.

AVIG targets a weighted average maturity of less than two years relative to the weighted average of its benchmark, the Bloomberg US Aggregate Bond Index.

AVSF, on the other hand, invests primarily in investment grade debt securities from a diverse group of US and non-US issuers with shorter maturities. The fund’s portfolio managers seek out bonds with high expected returns through a process that uses an analytical framework, which includes an assessment of each bond’s expected income and capital appreciation.

AVSF, which has a loading rate of 0.15%, is aiming for an average maturity of three years.

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