The SPDR Barclays High Yield Bond ETF (JNK) and SPDR DB International Inflation Protected Bond ETF (WIP) again topped our trend table last week. In the current environment, with inflation set-to pick up globally and pressure to raise interest rates soon, we believe there are three critical factors investors should consider when building a fixed income portfolio - fundamental credit quality, duration, international exposure.
We developed a model fixed income portfolio and the current holding of the strategy is 50% in high yield (JNK) and 50% in international inflation protected (WIP). This model portfolio has delivered a 6.2% return in the past one year, outperforming benchmark iShares Aggregate bond (AGG) by 47%, which gained about 4.2% in the same period. For a list of historical transactions this strategy has made, please refer here.
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Stable and Improving Fundamental Credit
The High Yield Bond ETF (JNK) provides a good balance of yield to maturity (7.42%) and duration (4.58 years). The ETF has a convexity of 0.02%, offering solid yield cushion in a rising rate environment. The fund’s credit quality is backed by a strong growth prospect of the underlying holdings. The fund is heavily tilted towards two sectors, with about 80% of its underlying holdings issued by industrial companies and about 10% by financial institutions.
These two sectors stand to benefit as the global economy enters into the expansionary phase of the economic cycle. Tailwinds provided by accommodative monetary policy and increased demand for industrial goods are likely to propel the earnings of these two sectors higher and help generate a solid cash flow. As investors venture outside of the short duration space and seek higher yields, the High Yield Bond ETF is one of the funds that offers an attractive credit spread in the medium-term duration space and deserves investor attention.
International Exposure
In addition to the embedded hedge against the weakening dollar, branching out to international debt markets and selecting non-dollar denominated funds with a focus on inflation-hedging and credit quality can provide strong protection and inflation-fighters for your portfolios. SPDR DB International Inflation Protected Bond ETF (WIP) is linked to DB Global Government ex-US Inflation-Linked Bond Capped Index (DBLNDILS).
Assets Class | Symbols | 03/25 | 03/18 | Direction |
International Inflation Protected | (WIP) | 4.79% | 6.29% | v |
High Yield | (JNK) | 3.97% | 3.74% | ^ |
International Treasury | (BWX) | 3.7% | 5.07% | v |
Inflation Protected | (TIP) | 1.9% | 3.77% | v |
Long Term Credit | (LQD) | 0.87% | 1.85% | v |
Intermediate Term Credit | (CIU) | 0.85% | 1.58% | v |
Emerging Mkt Bonds | (PCY) | 0.81% | 0.57% | ^ |
Short Term Credit | (CSJ) | 0.46% | 0.92% | v |
US Total Bond | (BND) | 0.27% | 1.12% | v |
Short Term Treasury | (SHY) | 0.19% | 0.47% | v |
Intermediate Treasury | (IEF) | 0.06% | 1.82% | v |
10-20Year Treasury | (TLH) | 0.05% | 1.8% | v |
Treasury Bills | (SHV) | 0.04% | 0.05% | v |
MBS Bond | (MBB) | -0.47% | 0.23% | v |
New York Muni | (NYF) | -0.49% | 0.01% | v |
20+ Year Treasury | (TLT) | -1.05% | 1.1% | v |
California Muni | (CMF) | -1.05% | -1.52% | ^ |
National Muni | (MUB) | -1.27% | -0.9% | v |
Trend Rankings: The trend table ranks each of the ten U.S. industrial iShares ETFs and the score is based on the following formula: for an ETF or index, we use the average of 1, 4, 13, 26 and 52 week total returns (i.e. dividend and distribution reinvested). Notice the average of the total returns would overweight the recent price movement. This is similar to exponential moving average.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
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