The New Approach to Fixed Income
📊 Closing Bell Overview
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The New Approach to Fixed Income
ETFs are popular for their diversification, liquidity, and compatibility with automated strategies.
They track indexes or asset classes, making them ideal for algorithmic trading and efficient portfolio management. With transparent pricing and real-time trading, ETFs allow seamless strategy execution with minimal effort, whether rebalancing, hedging, or following market trends.
Fixed income investments, once considered safe havens, are being re-evaluated. Utilizing innovative hedge strategies to reduce risks while optimizing returns. This article explores how ETFs offer a fresh perspective on navigating the bond market.
Fixed Income Risks: A Reality Check
The traditional belief that bonds are low-risk investments was challenged between March 2020 and October 2023, when the iShares 20+ Year Treasury Bond ETF TLT 0.00%↑suffered a 50% drawdown. This event underscored the vulnerabilities of fixed income, particularly in a rising interest rate environment.
A Strategic Hedge
One practical alternative for navigating the cycles of the bond market is the HYHG 0.00%↑ ETF, which combines high-yield corporate bond exposure with an interest rate hedge.
High-Yield Bonds: HYHG 0.00%↑ invests in corporate high yields bonds.
Interest Rate Hedge: The ETF uses short positions in U.S. Treasury futures to neutralize interest rate risk, offering near-zero duration exposure.
This strategy allows investors to benefit from high yields without excessive exposure to interest rate fluctuations.
A Floating Rate Solution
The floating rate strategy invests in bonds with interest rates that adjust with short-term rate changes, making them less vulnerable to rate hikes.
The USFR 0.00%↑ ETF, focused on U.S. Treasury securities with floating rates, offers a low-risk option that adapts to market conditions, preserving capital and liquidity.
HYHG vs. TLT and USFR
This image compares the performance of HYHG 0.00%↑, TLT 0.00%↑, and USFR 0.00%↑ ETFs from February 2014 (creation of USFR 0.00%↑) to August 2024.
HYHG 0.00%↑ achieved the highest Compound Annual Growth Rate (CAGR) at 3.67%, outpacing TLT 0.00%↑ (1.65%) and USFR 0.00%↑ (1.55%).
In terms of drawdown, TLT 0.00%↑ saw a significant -50% decline, while HYHG 0.00%↑ and USFR 0.00%↑ experienced smaller drawdowns of -27% and -3%, respectively, highlighting the stability of HYHG 0.00%↑ and USFR 0.00%↑ relative to TLT 0.00%↑.
Conclusion: A New Fixed Income Strategy
The significant recent drawdown in the bond market highlights the need for a new approach to fixed income. ETFs like HYHG 0.00%↑ and USFR 0.00%↑ provide innovative strategies for managing risks and capturing bond market opportunities.
By integrating these assets with advanced algorithmic tools into their portfolios, investors can better navigate today’s unpredictable market environment.
CLOSING BELL OVERVIEW: 08/20/2024
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ALPHA HEDGE PORTFOLIO REVIEW:08/20/2024
The Alpha Hedge Portfolio currently shows a -4.5% decline for the month, bringing the year-to-date performance to +14.5%. Over the 188-month period, the portfolio has achieved a total return of +34,987.8% with a compound annual growth rate (CAGR) of 45.6%, significantly outperforming the S&P 500, which returned 670.4% with a 14.0% CAGR over the same period.
