ETFs To Adjust Overall Risk
ETFs can also be added to an existing portfolio of individual bonds to adjust the overall risk characteristics.
For instance, investors with a laddered portfolio may wish to consider reducing some of their long-duration positions and reinvesting in very-low-duration muni ETFs (such as the PowerShares VRDO Tax-Free Weekly Portfolio (PVI) or the PIMCO Short Term Municipal Bond Active ETF (SMMU)). This in effect shifts their ladder from equal-weighting each maturity rung to over-weighting the shorter rungs of the ladder.
Because most municipal bond ETFs are managed to maintain a constant duration, they can be held for as long as they remain appropriate. Or investors can select one (or a mix) of target-date ETFs that will shorten in duration as time passes—just as individual bonds do. Using target-date ETFs means that when the shares are redeemed, the holder will have to reinvest their principal—a good thing if prevailing rates have moved higher (but not as desirable if rates have declined).
With 36 different muni ETFs to select from, there are many variations of how to assemble a portfolio. Depending on the size needed for each position and the liquidity of the underlying sector, in many cases, it may be possible to buy more shares than ordinarily trade on an average day.
See this article for additional insight about trading ETFs. To learn more about ladder and barbell portfolios, read Fixed Income Portfolio Structure. For additional guidance about selecting individual muni ETFs, please see this article.
Patrick Luby is a municipal bond market and portfolio strategy specialist and the author of www.IncomeInvestorPerspectives.com.
At the time of writing, the author held none of the securities referenced. This is not a recommendation to buy, sell or hold any of the securities or strategies mentioned. The author does not provide investment, tax, legal or accounting advice. Investors should consult with their own advisor and fully understand their own situation when considering changes to their strategy, tactics or individual investments. Information is based on sources believed to be reliable, but its accuracy is not guaranteed. Additional information is available upon request.