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ETF Specialist

A Tactical Tool For Dialing Down Fixed-Income Risk

This ETF is light on interest-rate risk and light on credit risk.

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Market participants have been bracing for an eventual hike for a few years now. According to interest-rate futures, the market is assigning a 56% probability that the Federal Reserve will hike its target rate to 0.25% from 0% at its next meeting on June 17. So, it is far from a foregone conclusion that Yellen and company will start raising rates this summer.

One of the most popular ways that investors have been preparing is by shifting toward the short-end of the yield curve. Shortening the average duration of a fixed-income portfolio can certainly be an effective way to limit the potential price impact from rising interest rates. However, there are some nuances to consider before piling into the short-end of the yield curve. As Morningstar analyst Thomas Boccellari noted in a recent article, interest-rate changes are rarely linear.

John Gabriel does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.