The role of ETFs in a fixed income portfolio

Pat Chiefalo from BlackRock gives his view on how investors should be utilizing ETFs in the current markets

The role of ETFs in a fixed income portfolio
Interest rates are always at the top of mind for investors who are trying to build or reposition the fixed income portion of the portfolios. With the interest rate situation being different this year than most – with the U.S. and Canada seemingly going in different directions – what moves should investors be making from a fixed income perspective? Well, the Managing Director, Head of iShares Canadian Product at BlackRock, Pat Chiefalo, has a definitive answer: investors should be utilizing ETFs to outsource some of their fixed income management.

“If investors want to run their portfolios with a specific view on where rates are going and how credits will behave, there are fixed income ETFs that allow them to tweak their exposures depending on their preferences,” Chiefalo says. “If they want to move lower down the credit ladder, there are large, liquid products that can do that. ETFs are particularly helpful in those cases because managing fixed income exposure using individual bonds is challenging from a cost perspective.”

Chiefalo sees individual exposure ETFs - aggregate bond, short-term bond or high yield bond ETFs - as a good way of helping investors to cut costs, achieve greater liquidity and generally tilt the portfolio in the direction they desire.

“While no one has a crystal ball to predict what happens in the market, asset managers spend a lot of time thinking about the fixed income markets and can then express their views in ETFs,” Chiefalo says. “It allows investors to benefit from that experience and analysis. ETFs are definitely a product investors can hold in their portfolios for a longer period of time. They require much less maintenance, oversight and trading than many other strategies.”

Fixed income can be a challenging market for investors to access and then advantage of. For investors who are sensitive about how they approach the credit ladder, specialized ETFs can act as the individual building blocks that customize that portion of the portfolio.

“Investors continue to look for income and in a world where interest rates could potentially move higher, some of those more traditional income generating assets face a little more risk of price erosion,” Chiefalo says. “To help mitigate that, we really like our dividend grower funds: ETFs that invest in companies that are expected to, and likely to, raise their dividends going forward and, with that, can help insulate the portfolio if rates were to go higher.”

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