Fed Post-Game: How Powell’s Comments Alter the Landscape 

Virtually every market pundit expected the Federal Reserve to hold rates steady at Wednesday’s meeting. And so, virtually every market pundit was right. 

There was no change in rates, but as usual, Chairman Jerome Powell did his obligatory verbal dance, answering questions as he does after each meeting. And he did so in a way that would not point too strongly in any direction, at least when it comes to future Fed policy. 

That said, he was clear that the Fed is far from considering the job done, even if the “job” is to monitor the lagging effects of the U.S. economy from their 11 rate hikes since March of last year.  

Bond ETFs More in Play 

Equities get the “star treatment” compared with bonds, but the bonds market, which is larger globally, has re-awakened in the eyes of investment advisors, thanks to a pair of recent developments: the surge in interest rates from the Fed’s rate hike cycle and ETF industry ingenuity. 

Several ways now exist to use the bond market as a tool to earn income, protect principal and pursue growth.   

About 20% of the 3,225 ETFs tracked in etf.com’s database are classified as Fixed Income funds, providing a wealth of investing choices. With rates elevated and the future of the yield curve in flux, this is an excellent time for advisors to deepen their range of bond-related exchange-traded funds they consider for clients. Here are a few to potentially add to research watchlists. 

Some Bond ETFs to Consider

 The iShares High Yield Corporate Bond Buy Write Strategy ETF (HYGW) is a consideration for those investors who are comfortable taking credit risk but prefer to be compensated beyond the extra yield they receive for owning ETFs that hold bonds considered much less secure than U.S. Treasuries. 

HYGW owns the largest high yield bond ETF, the iShares iBoxx $ High Yield Corporate Bond ETF (HYG) and writes covered call options on it each month. That stunts principal growth but produces a higher yield than the underlying “high yield” bonds can provide on their own.   

HYGW is a new and smaller ETF at $40 million in assets. However, since its debut on Aug. 22, 2022, it has outperformed HYG, 6.6% to 4.3%. HYGW’s yield over the past 12 months is 16.0% versus HYG’s 5.3%, which reflects the fact that the prices of the underlying bond holdings have fallen over the past year.   

For advisors and investors who prefer to toss the bond management ball to an active ETF, the RiverFront Strategic Income ETF (RIGS) has been a bond index-beater for a while. RIGS is just days short of its 10-year anniversary and has generated a total return of 30.5% during that time, versus 13.0% for the iShares Core US Aggregate Bond ETF (AGG), a popular benchmark for the U.S. bond market. 

RIGS, another relatively under the radar ETF at $106 million in assets, doesn't track a benchmark, leaving its managers tremendous flexibility in the management process.

Fixed-Rate Bond ETFs

 There are many ETFs that focus on owning the type of bonds that dominate the fixed-income market, specifically those with income rates that are “fixed”—they don’t change. But for advisors who either believe rates are not done rising, or are looking for a complement to more traditional, fixed coupon bond investments.  

The WisdomTree Floating Rate Treasury Fund (USFR) is an $18 billion ETF that owns a set of four U.S. government bonds whose rates adjust over time, in line with market rates. The bonds mature over the next three years, and USFR yields 5%.  

The Fed has made one thing very clear. That nothing is clear about the future path of rates. That uncertainty need not leave investment advisors and their clients worried, given the range of alternatives to traditional bond investing offered through ETFs.