How To Approach Today’s Bond Market

April 18, 2019 Many bond indexes are structured similarly to equities, where the issuers with the most debt outstanding have the highest weight. Should bond ETF investors be looking at other alternative weighting methods for their fixed income right now?

Urbanowicz: It all depends on what you're trying to do. Smart beta, market value weighting—we do both. They're just different tools in the toolbox.

Look at the PHB [Invesco Fundamental High Yield Corporate Bond ETF]. It's a fundamentally weighted, high-yield ETF that uses sales, cash flow, book value and dividend to determine weight. But that also produces a much-higher-credit-quality portfolio. It's a lower-volatility play on high yield.

That's not to say it's a superior approach to market-value weighting; it's just different. And there’ll be different times advisors will want to allocate to PHB versus just a broad benchmark. Are you finding that investors are buying and holding smart beta bond ETFs longer than market-value-weighted ones? Are the market-value-weighted ones more of a trading tool?

Urbanowicz: You see it on both ends of the spectrum. Some advisors believe in the factor tilt of a smart beta approach. They believe the methodology will produce excess risk-adjusted returns over the benchmark, and they'll buy and hold long term. But you have that in the cap-weighted landscape as well.

On the other end, you're starting to see assets grow in smart beta; you're starting to see trading volumes grow. More importantly, you're opening up a whole new world of applications for these smart beta fixed income ETFs, where you can use them as a liquid trading tool. This is probably the next stage for those smart beta products.

Contact Lara Crigger at [email protected]

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