This article is part of a regular series of thought leadership pieces from some of the more influential ETF strategists in the money management industry. Today’s article is by Chuck Self, chief investment officer and chief operating officer at iSectors, an outsourced investment manager.
The first several weeks of 2016 have been volatile, and many indicators suggest this environment will persist. Historically, advisors have turned to bonds as the first line of defense against falling stock prices.
However, with the Federal Reserve raising rates last year and signaling it will continue to rise in the coming quarters, there is increased risk that bond portfolio prices will decline in the future. Most of the solutions in these conditions increase credit risk at a time of slower economic growth, or raise international risk with enhanced currency or political exposures.
Advisors can find another solution for their clients’ portfolios during times of market uncertainty in defined-maturity ETFs. The funds buy a certain class of bonds that will all mature in a given year. Investors receive monthly income from the fund, and in a specified month of the maturity year, the fund is closed and funds are returned to investors.