With the Federal Reserve seemingly at a pause in raising interest rates, some fixed-income market watchers are reassessing their views on investing in debt vehicles. Mark Pfeffer, managing director of fixed-income investments at CLS Investments, says the Fed may be nearly finished or already done with raising rates, especially if inflation remains tame and growth slows. Aside from the Fed's action, debt markets may be near the end of a current expansionary cycle, says Guy LeBas, chief fixed-income strategist at Janney Montgomery Scott, who recommends investors reduce risk and invest in high-quality bonds. Here are eight of the best fixed-income investments to consider.
JPMorgan Ultra-Short Income ETF (JPST)
This exchange-traded fund is an option for investors who want to remain defensive even as the Fed pauses in its rate-tightening cycle, says Todd Rosenbluth, senior director of ETF and mutual fund research at CFRA. This actively managed bond ETF uses JP Morgan’s macroeconomic and sector research to choose bonds. It has a mix of corporate bonds, asset-backed securities and mortgage debt, along with U.S. Treasury bonds. The fund takes on some investment-grade credit risk, but the effective duration is less than one year. “You can get better bang for your buck while being defensive,” Rosenbluth says. JPST’s expense ratio is 0.18 percent.
Vanguard Short-Term Corporate Bond ETF (VCSH)
Pfeffer doesn’t believe the Fed will raise interest rates soon, citing low inflation and slower economic growth. For investors who want less interest-rate risk, he suggests higher quality credit and a shorter duration, such as VCSH. The fund holds investment-grade corporate bonds maturing in the next one to five years, with a weighted average maturity of three years, slightly longer than other short-term funds. The fund is heavily composed of industrial and financial sector debt. VCSH carries a yield of 3.16 percent, and is up 1.4 percent so far this year.
iShares 3-7 Year Treasury Bond ETF (IEI)
Pfeffer says he’s investing in the middle of the interest-rate curve, which offers some protection whether the Fed decides to resume hiking rates, or possibly cuts. He is buying higher-credit funds, such as IEI. He says if the Fed raises rates, it will likely only be one to two more times. This ETF should perform OK as it is still yielding over 2 percent and the duration is relatively short. If rates fall, investors are still protected from a duration standpoint for a few years because of its slightly higher yield. IEI has an expense ratio of 0.15 percent and a yield to maturity of 2.5 percent.
Vanguard Intermediate-Term Corporate Bond ETF (VCIT)
With the Fed pausing its interest rate hiking cycle this year, investors may be more comfortable taking on some interest rate risk, rather than hiding from rising rates, Rosenbluth says. Those investors may want to consider VCIT for their portfolio, he says. The ETF’s focus is on mostly single A and triple B investment-grade corporate bonds, most of which expire in the next five to 10 years. The fund boasts a yield of 3.82 percent, and is up 2.7 percent this year.
Federated High Income Bond Fund (FHIIX)
Investors who are willing to add more fixed-income risk as the Fed pauses could look at FHIIX, a high-yield bond mutual fund, Rosenbluth says. Like most high-yield bond funds, FHIIX takes on additional credit risk, but he notes historically the fund has performed well in both up and down markets. The fund focuses on companies with strong cash flow despite lower credit ratings. It’s had a good start to the year, he says. “You're paying up for active management, but it's delivered more often than not,” he adds. The 30-day SEC yield is 5.74 percent and it has had a year-to-date return of 4.75 percent.
SPDR Blackstone/GSO Senior Loan ETF (SRLN)
Diversification still has a place in a fixed-income portfolio, Pfeffer says, and there is still room for slightly riskier funds like high yield and bank loans. He prefers bank loans to high-yield bond ETFs because these assets usually have higher quality holdings. His bank loans pick is SRLN. He likes that it’s an actively managed bond ETF, which gives the manager the option to get in or out of investments. The fund also has more than $2 billion in assets under management. SRLN holds floating-rate senior secured debt of noninvestment-grade U.S. and foreign corporations. Its yield is 4.84 percent with an expense ratio of 0.7 percent.
SPDR Nuveen Bloomberg Barclays Short Term Municipal Bond ETF (SHM)
The federal tax code changes have prompted people who live in high-tax states, such as New York and California, to own municipal bonds as they try to shelter as much income as possible. SHM tracks an index of publicly traded short-term, tax-exempt, high-quality U.S. municipal bonds rated AA- or better and is overweight higher-rate general obligation bonds, which also boosts its credit rating. Pfeffer calls it “a decent place to hang out.” It has an expense ratio of 0.2 percent and a yield to maturity of 1.67 percent.
iShares National Muni Bond ETF (MUB)
LeBas says with the credit cycle likely ready to turn, one of his firm’s top sector picks is high-quality municipal bonds for people who can benefit from tax-free income. They recommend munis with a duration of five to 15 years. MUB is an example of an ETF to represent the national muni bond. It tracks a market-weighted index of investment grade-debt from state and local governments, and is tilted toward general obligation bonds. It has an expense ratio of 0.25 percent and yield to maturity of 2.43 percent.
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