As the fixed income environment changes, consider researching alternative ETF strategies.
After a three-decade bond market recovery, fixed income investors have become complacent about their holdings of the US Treasury. With interest rates set to rise, it may be time to consider other ETF strategies to better manage the potential risks ahead.
The 10-year Treasury yield is said to reflect what investors think the yield on money at the risk-free overnight rate set by the Federal Reserve will be, adjusted for a “term premium”, or some margin. Yield-built maneuver as insurance against rate bets go wrong, writes Justin Lahart for The Wall Street Journal. However, the current returns reflect the market view that the main risk to the forecast is that it could be too high.
Specifically, when the 10-year notes were at 1.56% on December 23, the 10-year overnight rate was 1.86% after adjusting for an estimate of the term premium. By comparison, Fed policymakers forecast the median overnight federal funds rate range to rise to 0.75% by the end of 2022, to 1.625% by the end of 2023, to 2.125%. by the end of 2024, and on average 2.5% over the long term. If the forecast holds, the current 10-year yield is more than half a point too low, and this ignores current inflation risks, which may contribute to overnight rate levels further. higher than expected.
In comparison, in 2011 the 10-year yield was 1.9%, and after adjusting for the term premium, the federal funds had an implied return of 1.05% per annum for the next decade. However, the actual yield was 0.63%.
In other words, the 10-year Treasury was a much better investment than short-term risk-free assets would have been in recent decades.
Going forward, after years of falling rates, complacent fixed income investors may no longer find that Treasuries can offer a similar position in a diversified bond portfolio.
Therefore, investors should reconsider their holdings and rebalance their positions to better suit their investment horizon and fixed income needs. For example, ETF investors can look to something like the Nationwide Nasdaq-100 Risk-Managed Income ETF (NYSE Arca: NUSI) to seek current income with a downside protection measure.
NUSI follows a rules-based options trading strategy that seeks to generate high income using the Nasdaq-100 Index, an index of the 100 largest non-financial stocks on the Nasdaq Stock Exchange. The ETF can potentially complement traditional allocations of equities and fixed income securities or serve as a potential hedge for investors.
The Nationwide Risk-Managed Income ETF establishes a tunnel strategy to generate monthly income. Collar strategies involve holding shares of the underlying stock while buying protective puts and writing calls for the same security. A put option gives its owner the right but not the obligation to sell the underlying asset at a specified price and date. A call option gives its owner the right but not the obligation to buy that asset instead.
For more news, information and strategy, visit our Retirement Income Channel.
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