The Fixed Income Conundrum: Part 2 Diversification Solutions
April 5, 2021
For investors and advisors, planning for income has been a consistent and escalating challenge for more than a decade. More recently, we have seen a yield curve inversion, a recession, and the 10-year treasury drop to a historic low at just over 0.50%. Today, plan implementation with traditional bonds is as challenging as it has ever been while inventories are light, spreads are tight, and yield is hard to come by. At the same time, we have seen a massive rise in the availability and adoption of fixed income ETFs as a viable alternative to achieve diversified exposure in the fixed income markets. In fact, according to Bloomberg, U.S. fixed income ETF assets are nearing $1 trillion (exhibit 1). Additionally, fixed income ETF growth has spanned all areas of the fixed income market and now offers easy access and diversification opportunities previously not readily available to individual investors. In the following article, we will consider the benefits of fixed income ETFs to diversify exposure and offer liquidity, as well as the use of active management to provide opportunities to tactically manage fixed income allocations across sectors not easily replicated through individual bond portfolios.