Balance Credit and Rate Risk With This Bond ETF
This ETF takes a novel approach to diversification.
Interest-rate risk has a much bigger impact on most core investment-grade bond portfolios than anything else. It explains 88% of the Bloomberg Barclays U.S. Aggregate Bond Index’s returns over the trailing 10 years through August 2019. That’s not necessarily a problem. The payoff to interest-rate risk is counter-cyclical because rates tend to rise during economic expansions and fall during recessions (lower rates lead to higher bond prices). So, interest-rate risk can help diversify stock risk. However, investors who are looking to balance the sources of risk in their bond portfolios might consider iShares Edge U.S. Fixed Income Balanced Risk ETF (FIBR). This could serve as a stand-alone core bond allocation, but it probably won’t diversify stock risk as well as an Aggregate Index tracker.
This fund targets an equal risk contribution from credit and interest-rate risk. So, it takes greater credit risk than most investment-grade-focused portfolios and less interest-rate risk. While it should deliver attractive performance over the long term, it will likely underperform during economic downturns, as rates tend to fall and credit spreads tend to widen during those times.
Alex Bryan does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.