ETF.com: Investment-grade corporates haven't done much. Is that a segment that's not offering a whole lot?
Williams: They out-yield Treasuries by a good deal. But you have to balance the overall portfolio. It's not just where you want to be, it's what kind of yield and duration you want the whole portfolio to have.
If I looked at the iShares iBoxx $ Investment Grade Corporate Bond ETF (LQD), it’s up about 2.5% this year, and the AGG is up less than 2%. Part of that's because it's had a little longer duration. But if you're out-yielding and rates are range-bound, you're just kind of clipping coupon as the year goes along. That's kind of what you want to do right now. There’s a little bit of outperformance there.
ETF.com: What's investors’ biggest concern about fixed income these days?
Williams: The biggest concern for many years is obviously the rate risk. People keep assuming every year that rates are going to go up. We’ve been having this conversation since back in 2010, every year. This year, we started with that fear after Trump was elected and rates spiked, and off to the races we were.
People are always a little confused about the direction of rates and how far they're going to go. So we try to preach the importance of looking at the big picture and the big influences. You should be out-yielding right now and not worried too much about the rate risk.
ETF.com: What ETFs do you like, and what positions did you get out of this year?
Williams: We started with the international overweight. We've done some tweaks on the fixed-income side. We were a little more aggressive early in the year with emerging market debt with the PowerShares Emerging Markets Sovereign Debt Portfolio (PCY)—we got out of that ahead of the first Fed meeting in case they were a little more hawkish on rates. We also got rid of bank loans recently because a lot of flows have gone into that. We wanted to get more yield, so we moved into regular corporates. We moved it into short high yield.
So we've made tweaks, but nothing major. We were positioned in the major parts of the market that we wanted to be going into the year, which was full allocation to EM, overweight international, overweight Europe, mostly a large and midcap bias. We’re staying away from small-caps—they’re overvalued.
The bias we've gotten wrong this year is the value bias. We thought we wanted to be in banks, in energy, in the value sectors. But rates have been even a little lower than we thought they would be. They kind of tailed down, so the value sectors haven't done as well this year.
But this has been a risky market to be defensive. For the first time, you have a synchronized global recovery.
Contact Cinthia Murphy at [email protected]