Fixed Income: Which Sectors Can Benefit from an Active Approach?
The information provided is for general informational purposes only. References to any specific securities, sectors or investment themes are for illustrative purposes only and should not be considered an individualized recommendation or personalized investment advice, and should not be used as the basis for any investment decision. This is not a representation of any securities Lord Abbett purchased or would have purchased or that an investment in any securities of such issuers would be profitable. Statements concerning financial market trends are based on current market conditions, which will fluctuate. There is no guarantee that markets will perform in a similar manner under similar conditions in the future.
This article may contain assumptions that are “forward-looking statements,” which are based on certain assumptions of future events. Actual events are difficult to predict and may differ from those assumed. There can be no assurance that forward-looking statements will materialize or that actual returns or results will not be materially different from those described here.
A Note about Risk: The value of investments in fixed-income securities will change as interest rates fluctuate and in response to market movements. Generally, when interest rates rise, the prices of debt securities fall, and when interest rates fall, prices generally rise. Bonds may also be subject to other types of risk, such as call, credit, liquidity, interest rate, and general market risks. High-yield securities, sometimes called junk bonds, carry increased risks of price volatility, illiquidity, and the possibility of default in the timely payment of interest and principal. Moreover, the specific collateral used to secure a loan may decline in value or become illiquid, which would adversely affect the loan’s value. Longer-term debt securities are usually more sensitive to interest-rate changes; the longer the maturity of a security, the greater the effect a change in interest rates is likely to have on its price. Lower-rated bonds may be subject to greater risk than higher-rated bonds. No investing strategy can overcome all market volatility or guarantee future results. Statements concerning financial market trends are based on current market conditions, which will fluctuate.
Duration is the change in the value of a fixed-income security that will result from a 1% change in market interest rates. Generally, the larger a portfolio’s duration, the greater the interest-rate risk or reward for underlying bond prices.
An Exchange-Traded Fund “ETF” is a security that tracks an index, a commodity or a basket of assets like an index fund, but trades like a stock on an exchange. ETFs experience price changes throughout the day as they are bought and sold. ETF products, like all investments, are subject to market risk, which may result in loss of principal. Bond ETF products are subject to interest rate, credit, and inflation risk.
The Sharpe ratio was developed by Nobel laureate William F. Sharpe as a measure of risk-adjusted performance. It is calculated by taking an asset class’s (or portfolio’s) excess return above the risk-free rate and dividing it by the standard deviation of its returns. The greater the Sharpe ratio, the better the risk-adjusted performance has been.
Standard deviation is a measure of the dispersion of a set of data from its mean. If the data points are further from the mean, there is higher deviation within the data set. Standard deviation is calculated as the square root of variance by determining the variation between each data point relative to the mean.
Treasuries are debt securities issued by the U.S. government and secured by its full faith and credit. Income from Treasury securities is exempt from state and local taxes. Although U.S. government securities are guaranteed as to payments of interest and principal, their market prices are not guaranteed and will fluctuate in response to market movements.
Volatility in finance is the degree of variation of a security’s value over time. A lower volatility means that a security's value does not fluctuate dramatically, but changes in value at a steady pace over a period of time.
Indexes are unmanaged, do not reflect the deduction of fees or expenses, and are not available for direct investment.
The Bloomberg Barclays U.S. Aggregate Bond Index represents securities that are SEC-registered, taxable, and dollar denominated. The Index covers the U.S. investment-grade fixed-rate bond market, with index components for government and corporate securities, mortgage pass-through securities, and asset-backed securities. Total return comprises price appreciation/depreciation and income as a percentage of the original investment.
The Bloomberg Barclays Global Aggregate Bond Index is a broad-based measure of the global investment-grade, fixed-income markets. The three major components of this index are the U.S. Aggregate, the Pan-European Aggregate, and the Asian-Pacific Aggregate indexes. The index also includes euro dollar and euro/yen corporate bonds, Canadian government securities, and U.S. dollar investment-grade 144A securities.
The Bank of America Merrill Lynch Global High Yield Index tracks the performance of USD, CAD, GBP and EUR denominated below investment grade corporate debt publicly issued in the major domestic or eurobond markets. Qualifying securities must have a below investment grade rating (based on an average of Moody’s, S&P and Fitch). For Canadian dollar securities only, Fitch is replaced by DBRS in the rating calculation. In addition, qualifying securities must have an investment grade rated country of risk (based on an average of Moody’s, S&P and Fitch foreign currency long term sovereign debt ratings), at least one year remaining term to final maturity, a fixed coupon schedule and a minimum amount outstanding of USD 100 million, EUR 100 million, GBP 50 million, or CAD 100 million. Original issue zero coupon bonds, "global" securities (debt issued simultaneously in the eurobond and domestic bond markets), 144a securities and pay-in-kind securities, including toggle notes, qualify for inclusion in the Index. Callable perpetual securities qualify provided they are at least one year from the first call date. Fixed-to-floating rate securities also qualify provided they are callable within the fixed rate period and are at least one year from the last call prior to the date the bond transitions from a fixed to a floating rate security. USD and CAD denominated eurobonds are not included in the Index, however, USD and CAD denominated global securities are included. Taxable and tax-exempt US municipal, US DRD-eligible, euro legacy currency and defaulted securities are excluded from the Index.
The S&P 500/LSTA Leveraged Loan 100 Index is a market value-weighted index designed to reflect the performance of the largest facilities in the leveraged loan market. The index consists of 100 loan facilities drawn from a larger benchmark – the S&P/LSTA (Loan Syndications and Trading Association) Leveraged Loan Index (LLI). It mirrors the market-weighted performance of the largest institutional leveraged loans based upon market weightings, spreads and interest payments.
Vanguard Total Bond Market Index Fund Investor Shares (VBMFX) is designed to provide broad exposure to U.S. investment-grade bonds, and invests about 30% in corporate bonds and 70% in U.S. government bonds.
iShares Core U.S. Aggregate Bond ETF (AGG) seeks to track the investment results of the Bloomberg Barclays U.S. Aggregate Bond Index, which measures the performance of the total U.S. investment-grade bond market.
The Vanguard Short-Term Bond Index Fund Investor Shares (VBISX) seeks to provide broad exposure to U.S. investment-grade bonds with maturities from one to five years. It invests about 30% of assets in corporate bonds in 70% in U.S. government bonds.
The Vanguard Short-Term Bond ETF (BSV) seeks to track the performance of the Bloomberg Barclays U.S. 1-5 Year Government/Credit Float Adjusted Rate Index, a market-weighted bond index that covers investment-grade bonds with a dollar-weighted average of 1 to 5 years. It invests in U.S. government, investment-grade corporate, and investment-grade international dollar-denominated bonds.
The iShares iBoxx $ High Yield Corporate Bond ETF (HYG) seeks to track the investment results of the Markit iBoxx USD Liquid High Yield Index, which is comprised of U.S. dollar-denominated, high yield corporate bonds.
The SPDR® Bloomberg Barclays High Yield Bond ETF (JNK) seeks to provide investment results that correspond generally to the price and yield performance of the Bloomberg Barclays High Yield Very Liquid Index, which measures the performance of publicly issued U>S>-dollar denominated high-yield corporate bonds with above-average liquidity.
The PowerShares Senior Loan Portfolio (BKLN) is based on the S&P/LSTA U.S. Leveraged Loan 100 Index, and normally invests in at least 80% of its total assets in the component securities that comprise that Index, which tracks the market-weighted performance of the largest institutional leveraged loans based on market weightings, spreads and interest payments.
Morningstar Category rankings are based on total returns at net asset value and include the reinvestment of all distributions and do not take into account sales charges. Morningstar percentile rankings for the specified periods are relative to all share classes of funds that have the same investment categories.
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