Years of aggressive monetary accommodation have kept rates low and returns high across developed world bond markets. But yields are drifting higher, central banks are a little less cautious and inflation could be on the mend. We are, finally, nearing normalisation. This is a major challenge for bond investors - what can they do to protect what they have?
If these issues are of concern to you, there are corners of the fixed income market which could offer you a solution. Find out more...
5 choices for the road ahead
- Smart Cash: better than what's available in the bank
For investors unwilling to take on interest rate risk, Lyxor's Smart Cash funds may help. Our USD "Smart Cash" enhanced cash ETF offers 0.20% above the Fed Funds rate; which is remarkable considering it takes on absolutely no interest rate risk. It manages to do so by using repo transactions to add an extra source of return.
Our European enhanced cash ETF offers EONIA +5bp. These yields are better than those of most other cash products on the market at present.
>>View the Lyxor Smart Cash ETF
- Floating Rate Notes: countering higher rates
Lyxor's range of floating rate note (FRN) ETFs have proven popular recently as they all but cancel out duration risk. The bonds they provide exposure to pay coupons linked to the level of interest rates, which means they offer a natural hedge against rising rates.
We run euro- and US dollar-denominated ETFs that invest in FRNs issued by investment-grade companies. European investors looking to avoid FX risk can invest in a currency-hedged version of the dollar ETF. Our European ETF has a management fee of just 0.15% and the dollar fund has the lowest TER on the market at only 0.10%.
>>Find out more about Floating Rate Notes and inflation protection
- Inflation-linked bonds: tackling higher inflation
Investors keen for coupon payments that will move up in line with inflation can choose from our range of inflation-linked bond ETFs. It's the most comprehensive of its kind in Europe, with discrete exposure to US, UK and eurozone inflation - and management fees ranging from as low as 0.07%. Our US TIPS strategy is available in a GBP-hedged version, which has proved popular with UK investors.
>>View Lyxor's range of inflation protected ETFs
- Inflation expectations: protecting against higher rates and higher inflation
We also run a unique family of "inflation expectation" ETFs. They offer exposure to a given market's inflation expectations while stripping out interest rate risk by going long inflation-linked bonds and short government bonds with equivalent duration. They are the only such strategies on the market, and are again available in euro, US and UK versions. Since their launch last year, we've already gathered close to EUR 1 billion of assets.
>> Learn more about inflation expectations ETFs
- High yield: move up the risk-return spectrum
Investors looking for more yield, and willing to take the additional risk to get it, could consider our range of high-yield ETFs. As well as offering standard all-maturity US and European high yield ETFs, we also run shorter-maturity versions that involve considerably less duration risk and credit sensitivity. Again, our USD indices can be currency-hedged. Our high-yield ETFs have posted the best returns on the market and with they come with lowest TERs than anywhere else: just 0.30% for the unhedged versions and 0.40% for the hedged.
>>Find out more about High Yield and yield staples
A caveat
If, however, these market events don't come to pass you'll have paid more for this protection, and accepted a lower yield than that available on conventional bonds.
Unless otherwise stated, all product data from Lyxor ETF, correct as at 6 October 2017. Past performance is no guide to future returns.
Disclaimer
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Research disclaimer
This material reflects the views and opinions of the individual authors at this date and in no way the official position or advices of any kind of these authors or of Lyxor International Asset Management and thus does not engage the responsibility of Lyxor International Asset Management nor of any of its officers or employees. This research is not an offer to sell or the solicitation of an offer to buy any security in any jurisdiction where such an offer or solicitation would be illegal. It does not constitute a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual clients. Clients should consider whether any advice or recommendation in this research is suitable for their particular circumstances and, if appropriate, seek professional advice, including tax advice. Our salespeople, traders, and other professionals may provide oral or written market commentary or trading strategies to our clients and principal trading desks that reflect opinions that are contrary to the opinions expressed in this research. Our asset management area, principal trading desks and investing businesses may make investment decisions that are inconsistent with the recommendations or views expressed in this research.
