Economist John Maynard Keynes once famously quipped “When the facts change, I change my mind.” Since he first uttered this, time has proven the wisdom of this phrase time and time again. The importance of adaptability in investing has always been paramount to long-term success and this is especially true for the “new era” of fixed income.
For decades, investing in fixed income was (in hindsight) relatively easy: Given a backdrop of secularly declining interest rates, an allocation to bonds was likely to pay off. 2022 changed all of that. As the Federal Reserve embarked on its most accelerated campaign of interest rate hikes since the days of Paul Volcker, the long bond bull market ended in decisive fashion and investors were once again reminded of the risk in bonds.
While rates won’t stay at current levels forever, one thing is also true…they will likely be much more volatile over the next several decades (as opposed to the last few). Investors must adapt to this new era. For many investors, long-duration Treasuries were the default “risk-off” position. Indeed, equities and bonds have experienced greater correlation since 2022, in large part because higher rates weighed on stocks and bonds at the same time. To succeed in this brave new fixed income world, the twin risks of credit and duration must increasingly be managed.
Enter the IDX Dynamic Fixed Income ETF (DYFI). DYFI is an ETF-of-ETFs that dynamically allocates among fixed income sectors in order to seek both income and downside protection. Unlike passive bond indices, which are generally concentrated in Treasuries, Mortgage-Backed Securities, and Corporate Bonds, DYFI takes advantage of a broader spectrum of fixed income opportunities such as bank loans, Treasury Inflation-Protected Securities (TIPS), and high-yield bond ETFs. DYFI also has the ability to invest up to 25% of its assets in Inverse-Treasury ETFs, a feature that gives the fund the potential to profit from declines in the market for government bonds. The gives the IDX Dynamic Fixed Income ETF the ability to manage both duration and credit risk associated with long-bond portfolios while still seeking a higher yield over time.
DYFI is an actively managed, rules-based ETF that utilizes quantitative models to determine which fixed income ETFs to include and how to allocate across them. The fund owns at least 3 fixed-income ETFs at any given time and allocations can change as frequently as weekly. By investing in fixed income ETFs (as opposed to cash bonds), the fund seeks to benefit from superior liquidity afforded by the ETF market. This gives DYFI the ability to toggle between the various corners of the fixed-income universe depending on market conditions in a way that would be difficult (or impossible) to do with bonds directly. But while positions can change, what remains constant is the managers’ aim to provide investors with both income and downside protection.
Expand Your Fixed-Income Universe for the New World of Interest Rates
The landscape of fixed-income investing has changed, perhaps for many years to come. We believe that the investors who do well in the new environment will be those who don’t limit themselves to traditional fixed-income ETFs. DYFI can help.
Please read the prospectus carefully before investing. [CLICK HERE].
Investing involves risk. Principal loss is possible. ETFs are subject to additional risks that do not apply to conventional mutual funds, including the risks that the market price of an ETF’s shares may trade at a premium or discount to its net asset value, an active secondary trading market may not develop or be maintained, or trading may be halted by the exchange in which they trade, which may impact an ETF's ability to sell its shares. Shares of any ETF are bought and sold at market price (not NAV) and are not individually redeemed from the ETF. Brokerage commissions will reduce returns.
IDX Shares ETF are distributed by Foreside Financial Group, LLC. IDX and Foreside are unaffiliated
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
IDX Shares
As pioneers in Hedge Fund Replication, we understand how to navigate the complexities inherent in Dynamic investment strategies. At IDX, our core mission revolves around demystifying these complexities for our investors.
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