With the Federal reserve’s announcement that they would buy corporate debt ETFs in order to support the markets, fixed income ETFs have seen a considerable uptick. But many investors don’t understand fixed income ETFs beyond the fact that they offer diversification and a steady stream of income.

The Basics

Fixed Income ETFs hold fixed income securities such as bonds, notes, and certificates. They often focus on a particular strategy around corporate debt, government debt, municipal debt, or international debt. Fixed income ETFs can also follow a broad index strategy.

Fixed Income ETFs also offer varying maturity exposures, or when the principal amount of debt plus interest is due. A bond ETF issuer has to closely track the ETF’s index in a cost-effective manner, which can often be difficult due to the lack of liquidity in the bond markets. 

This can lead to trading issues with fixed income ETFs when there is a lot of volatility. In March, we saw a number of large ETFs trading at steep discounts due to the fact that the ETF’s price became unhinged from the fair value of the underlying securities in the fund.

 

Risk

It’s important to understand what is in your fixed income ETF because it determines the level of risk you are taking. Let’s break down the types of risk you are exposed to when investing in fixed income ETFs.

Credit Risk

The credit risk of an ETF is all dependant on the credit exposure. Securities issued by the US government such as Treasury offer less credit risk, while securities issued by corporations are riskier because if they go bankrupt, then you won’t be able to collect on the debts.

Duration Risk

Duration risk occurs when changes in interest rates either increase or decrease the value of a fixed income ETF. Understanding maturity exposures within your fixed income ETF will help you better understand the duration risk associated with it.

How Can I See What’s In my Fixed Income ETFs?

ETFLogic offers a comprehensive portfolio analysis tool that can dive deep into a single fixed income ETF or portfolio of ETFs to provide a detailed overview of bond types, maturity, exposures, credit exposures, as well as risk profiling of fixed income ETFs.

To access the tool, you can sign up via the button below.

Scott McKenna

Scott McKenna

Sales & Marketing Director