An active bond ETF can better adapt to today’s changing conditions

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Fixed income investors should consider an actively managed fixed income exchange-traded fund strategy, capable of maneuvering in a rapidly changing bond market while generating attractive yield opportunities along the way.

In the recent webcast, Why today’s bond market demands active managementGreg Tornga, Managing Director and Portfolio Manager at Principal Global Asset Allocation, pointed out that rates remain low, but the move to higher rates should be smooth, so bond investors should not expect a repeat of the so-called taper tantrum, as the Federal Reserve has been very transparent with the normalization of its policy.

In view of the turbulence ahead, credit markets have remained resilient. The continued support has helped support developed markets, and progress towards policy standardization will be slow, which should continue to support risky assets, Tornga said.

However, Mark Cernicky, investment specialist at Principal Global Fixed Income, warned that investment grade companies are riskier today than in the past, so investors should re-evaluate the passive exposure of quality companies and consider an approach. active. Specifically, Cernicky pointed out that risk tends to increase in higher quality companies, as shown by the Bloomberg US Investment Grade Corporate Index, which is now exposed to higher durations and a greater tilt towards the BBB rated credit.

Additionally, Cernicky warned that the investment grade market is inefficient, so there are opportunities for more skilled fund managers to navigate these muddy waters better. Additionally, Cernicky pointed out that there are risk stratifications of quality companies with carry securities which may over-compensate investors and duration securities which may under-reward investors.

Cernicky also argued that prioritizing factors can help minimize tail risk. The bottom quintile of the US IG Index has a maximum drawdown of 12.7% with annualized returns of 5.5% and annualized volatility of 6.0%. In comparison, the top quintile of the benchmark shows a maximum drawdown of 6.4% with annualized returns of 5.9% and annualized volatility of 4.7%.

Depending on the major ETFs, stratification and prioritization of factors can help manage risk. Cernicky explained that when taking a top-down approach, Principal uses propagation and duration to stratify the IG universe into risk cohorts, as well as the assignment of daily performance by risk cohort that helps evaluate structural decisions. descendants and ascending stock selection within cohorts. . In addition, it is accompanied by independent risk monitoring. When taking a bottom-up approach, Principal uses quality and value scores used to minimize tail risk while maintaining a spread advantage over the index, takes a forward-looking independent credit rating and follows exit strategies if necessary.

Matthew Cohen, head of the ETF sales team at Principal ETFs, argued that active management can help drive alpha from bond structure, macro and selection, while top and bottom risk is designed to mitigate volatility.

More precisely, the ETF Corporate Assets Principal Investment Grade (NYSEArca: IG) is an option that investors can consider. IG is an actively managed fund, a potentially beneficial feature at a time when demographic changes could disrupt traditional investment in corporate bonds. The ETF attempts to provide current income and capital appreciation by investing in investment grade corporate bonds rated BBB or above by S&P Global Ratings or Baa3 or above by Moody’s Investors Service.

IG combines bottom-up independent credit research with a top-down strategy, seeking alpha through credit selection, sector rotation, curve positioning and a forward-looking iterative process. This mechanism seeks loans with a stable to improving credit rating trajectory that can benefit from compression of spreads and income premiums, an approach relevant in the current business credit climate.

IG may include global exposures because its fixed income pool covers foreign securities, corporate securities, securities issued or guaranteed by the US government or its agencies and instruments, and securities issued or guaranteed by foreign governments payable in US dollars. In addition, it may invest in other investment companies, including exchange traded funds that invest in fixed income securities.

Financial advisers who want to learn more about the bond markets can watch the webcast here on request.


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