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  The right investment strategy for the bond market | Special Edition | Bit Updates
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The right investment strategy for the bond market | Special Edition

Sunday, February 18th, 2018 | bitcoin updates

Core strategy in the bond market

As part of its core fixed income strategy, State Street Global Advisors' experts focus on investment grade bonds (at least "BBB-"). This is because there is a relatively low risk of a default by the issuer. In addition, core portfolios may be diversified by type, region or maturity of the fixed income investment to take advantage of additional return opportunities. With the increased risk of default in many cases since the financial crisis due to higher levels of debt in relation to GDP and sometimes negative government bond yields, investors are increasingly seeking to generate additional returns on corporate bonds. In recent years, the number of issues of corporate bonds has risen sharply, so that this sector also offers a wide variety. Corporate bonds are, in most cases, more attractive than government bonds, but with a greater risk of default. In the context of regional diversification, it makes sense to use the different interest rates and developments of different economic sectors with global or regional bonds outside the home market. A structure oriented towards the term of a bond – the so-called duration management – is gaining in importance against the backdrop of a looming monetary policy tightening: For the prices of cross-country skiers are more affected by rising interest rates than is the case for short-end securities.
ETFs in fixed income core portfolio

For the development of fixed-income core portfolios, ETFs represent interesting investment alternatives. Private investors can thus invest in this asset class, which was previously difficult to access for smaller investment amounts. For example, SPDR offers a huge selection of flexible ETFs that can quickly make portfolio adjustments based on maturity, creditworthiness or currency. In addition, ETFs can be sold quickly due to the continuous trading on the stock exchanges and can thus be part of a liquidity management. Also worthy of note is the high level of precision with which investors can manage their investments: Investment Grade ETFs' SPDR product range tracks a single index family within its sovereign bond and corporate bond funds. This ensures that there is no overlap or duplication of bonds between the segments. Private investors in particular benefit from the comparatively low cost of ETFs compared to investing directly or investing in a traditional bond fund.
More return through diversification

In order to generate positive returns in the low interest rate environment, investors will need to review the risk structure of their fixed income portfolios. One option is ETFs that invest in high yield bonds. However, the rating of high yield bonds is below investment grade, so the higher coupon has to be bought at a higher risk. In addition, emerging market bonds, which can be purchased in local currency and hard currency, offer potential for greater returns. For local currency debt, investors must be mindful of the associated currency risk: a devaluation of the local currency reduces the value of their bond. With "soft currencies", this effect can sometimes even overcompensate the coupon. However, the diversification effect is enormous: Emerging market bonds in local currency generally have only a very low correlation to the bond markets of the industrialized countries. It should be noted that emerging market hard currency debt is mostly denominated in US dollars. Euro investors are thus also subject to a currency risk here. There is also an increased risk of default as emerging market issuers are vulnerable to external shocks such as a sudden devaluation of their currency against the US dollar.

Another popular means of optimizing returns is convertible bonds, which are a hybrid of stock and fixed income securities. Investors are using this form of investment to reduce the risk of loss and volatility of equity exposures. While it has been rather difficult and expensive for private investors to buy convertible bonds in the past, there are now favorable alternatives for investment funds and ETFs. Because of the option to purchase a stock, converters can also benefit from rising stock prices.
Portfolio Diversification – Advantage ETF!

Not only are ETFs a cost-effective diversification instrument, they also provide the only option for passive, flexible and cost-effective exposure to niche markets. Due to the high liquidity of this investment instrument, portfolio adjustments can be implemented quickly even in volatile emerging and niche markets. A targeted mix, thanks to the transparency of ETFs, can reduce or even eliminate risks such as overlapping of positions, overweighting of regions, and issuer and maturity risk.

Source: DD Images / Shutterstock.com


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