Tom Lydon: Fixed income ETF strategies for further interest rate cuts

The Federal Reserve has lowered interest rates twice this year and the door remains open to more rate cuts, which could further bolster the case for fixed income exchange traded funds. As it is, bond ETFs are experiencing significant growth, thanks to increased adoption by advisors and institutional investors.

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As of June, there was over $1 trillion in global fixed income ETF assets, meaning that total has more than quadrupled since 2011.

“Not only have fixed income ETF assets increased but so too has the investor base using these funds,” said State Street in a recent note. “Wealth management and institutional investors are projected to increase their use of fixed income ETFs over the next few years, according to reports from Cerulli and Greenwich Associates, adding to an expanding and evolving user base that includes individual investors and financial advisors.”

Amid a favorable interest rate backdrop, here are some fixed income ETFs for investors to consider over the near-term.

SPDR Portfolio Corporate Bond ETF (SPBO)

A recent addition to the low-cost SPDR Portfolio suite, the SPDR Portfolio Corporate Bond ETF provides cost-effective investment-grade corporate bond exposure.

“US-listed fixed income ETFs have a median expense ratio of 0.25% versus mutual funds’ median ratio of 0.6%. While many ETFs are index-based, this lower cost profile carries over to actively managed ETFs that have a median expense ratio of 0.41% versus 0.68% for actively managed bond mutual fund strategies,” according to State Street.

SPBO is even cheaper. The SPDR fund charges just 0.06% per year, or $6 on a $10,000 investment.

FlexShares Core Select Bond Fund

The FlexShares Core Select Bond Fund can be viewed as an improvement upon the standard aggregate bond ETFs on the market today.

BNDC looks to provide attractive risk-adjusted performance by investing in a portfolio of fixed-income securities and is designed to achieve the optimal potential for return, according to the prospectus. Moreover, the active component will adjust to potential changes in interest rate levels, the shape of the yield curve and credit spread relationships while emphasizing liquidity and diversification.

“BNDC is outperforming the aforementioned Bloomberg Barclays U.S. Aggregate Index by about 70 basis points with a yield that's 30 basis points higher than the benchmark,” according to Nasdaq.

SPDR Portfolio Mortgage Backed Bond ETF

Another addition to the low-cost SPDR Portfolio, the SPDR Portfolio Mortgage Backed Bond ETF provides exposure to mortgage-backed securities (MBS).

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MBS are created when an entity acquires a bundle of mortgages and then sells the securities. Most MBS are seen as “pass-through” security where the principal and interest payments are passed through the issuer to the investor.

While MBS may offer modestly higher yields relative to U.S. Treasuries, the mortgage-backed bonds are exposed to prepayment risk – if rates dip before the security’s maturity, a homeowner can refinance debt, causing an investor to get back the principal early and reinvest it in a security with a lower yield.

For more information on the fixed-income space, visit ETF Trends' Fixed Income Channel.

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Tom Lydon is CEO of ETF Trends.