Fixed income factor investing has become increasingly popular among investors seeking stable returns. By tilting bond portfolios towards certain factors like value, momentum and quality, investors can aim to generate excess returns over the broad bond market. In this article, we will explore leading examples of fixed income factor investing strategies and how to best utilize them.
Dimension Fund Advisors offers a suite of fixed income factor ETFs
Dimension Fund Advisors (DFA) provides a range of fixed income ETFs targeting different factors like short-term bonds, inflation-protected securities and emerging market debt. Their ETFs follow a passive, index-based approach aligned with academic research on fixed income investing. For example, the DFA Short-Term Government ETF (DFSG) selects U.S. government bonds with shorter maturities than a standard Treasury index. This factor tilt aims to improve returns by reducing interest rate sensitivity.
BlackRock’s iShares suite includes several fixed income factor ETFs
As the world’s largest asset manager, BlackRock offers investors many factor-based fixed income ETFs. Their iShares Short Maturity Bond ETF (NEAR) focuses on short-term corporate bonds, which can reduce volatility versus a traditional bond index. Other notable iShares fixed income ETFs target factors like value (IVAL), momentum (IMOM) and quality (IQLT). With its vast resources and indexing expertise, BlackRock is well positioned to deliver diversified exposure to desired fixed income factors.
Vanguard’s fixed income factor ETFs focus on maturity over other factors
Vanguard, another indexing giant, offers investors low-cost fixed income factor ETFs concentrated around bond maturities. For example, their Short-Term Corporate Bond ETF (VCSH) tracks an index of U.S. corporate bonds with 1-5 year maturities. Vanguard also offers target maturity ETFs focused on bonds maturing in a specific year. However, Vanguard currently does not provide fixed income ETFs based on other factors like value and momentum favored in academic research.
PIMCO and DoubleLine fixed income funds incorporate factors
In addition to ETFs, many top active fixed income managers incorporate factors into their mutual funds and variable insurance portfolios. Fund companies like PIMCO and DoubleLine analyze factors like yield spreads, duration, and security selection to beat their benchmarks. Retail investors can access institutional-quality fixed income factor exposures through these fund managers. However, higher fees relative to passive ETFs should be considered.
Leading providers of index and active fixed income strategies are increasingly adopting factor-based approaches. Dimension and BlackRock offer the broadest range of fixed income factor ETFs spanning credit quality, inflation protection and emerging markets. While Vanguard focuses mostly on maturity factors. On the active side, managers like PIMCO and DoubleLine also orient their security selection towards rewarded factors.