In conjunction with Nasdaq, TMX VettaFi’s Head of Research Todd Rosenbluth co-hosted an Asset Allocation Summit webinar session that targeted a growing fixed income space that continues to evolve. With fixed income ETFs crossing $325 billion in inflows in mid-October, investor interest will only increase, with options aplenty. Justin Danfield, a fixed income ETF specialist with Invesco, was one of the guests providing ETF options that best suit the current market conditions.
Investors can agree that market uncertainty isn’t just associated with equities. Tariffs and geopolitical tensions are also permeating the fixed income market, but the majority of that uncertainty centers around interest rates. Using the CME Group’s FedWatch as a gauge, over 90% are forecasting the Fed will institute two more rate cuts before 2025 turns into 2026. The panel of speakers that included Danfield was asked to posit on how many rate cuts to expect.
“We see two cuts by the end of the year,” Danfield forecasted. He added that they think “inflation [tariff-induced] could pick up.”
“I think all eyes are on the labor market. And if that sees anymore weakening, I think we could continue to see cuts,” he added.
Venturing Out on the Yield Curve & Munis
With the anticipation of interest rates and subsequently yields falling, investors may be wondering how to sustain the income they’ve been accustomed to the last few years. One of the ways Danfield noted is to venture further out on the yield curve, starting with intermediate bonds. They can strike the balance between increasing income as well as mitigating rate risk.
“So investors can really look beyond the rate cuts, whether it’s going to be one or two this year, and start to allocate to intermediate credit,” he noted.
Municipal bonds have been one of the corners of the bond market getting more interest with their strong credit fundamentals and attractive yields. Of course, the federal tax-free income is an obvious benefit, but the ETF marketplace is full of fresh opportunities to slice and dice muni exposure.
“We’ve seen interest on indexed products in the long end for those wanting to capture those high yields,” Danfield said. He added that active fixed income ETFs in muni debt is also garnering increased interest. “You’re starting to see investors open up to a variety of muni strategies.”
Invesco offers its BulletShares suite that includes municipal bond exposure. Danfield mentioned two: the Invesco BulletShares 2030 Municipal Bond ETF (BSMU) and the Invesco BulletShares 2029 Municipal Bond ETF (BSMT). The product suite is unique in that it gives the principal back to investors once maturity dates are reached. That makes them ideal for building bond ladders.
“Individual bondlike experience in the ease of an ETF wrapper,” Danfield said.
Flexible Options in Today’s Market
The opportunities in fixed income ETFs are vast, creating opportunities for providers to create income-producing funds that can suit today’s uncertain environment. As mentioned, interest in active funds is picking up. Invesco has the actively managed Invesco Variable Rate Investment Grade ETF (VRIG) that invests in a variety of debt to extract diversified yield opportunities in various credit markets.
“It’s a collection of high-quality, structured credit,” Danfield said of VRIG, adding that investors are “getting a multisector approach. They’re getting access to cross-structured credit from mortgages, commercial mortgage-backed securities (CMBS), and asset-backed securities (ABS) while keeping that high quality.”
Another fund investors may want to consider is the Invesco Equal Weight 0-30 Year Treasury ETF (GOVI), which provides more nuanced exposure to Treasuries using a laddering approach without the use of individual bonds. It tracks the ICE 1-30 Year Laddered Maturity US Treasury Index (Index), which includes up to 30 U.S. Treasuries representing the annual February maturity ladder across the yield curve.
These options are just a smidgen of what the ETF marketplace has to offer as the space continues to evolve and innovate. But Danfield noted that the way fixed income should slot into a portfolio really boils down to the basics.
“There’s a lot of shiny tools out there,” he explained. In the end, however, “it really is a ballast for a portfolio.”
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