The ability to protect against downturns in the bond market is another unique feature offered by ETFs. This is particularly useful for investors who may not want trigger trading costs and taxes by selling their bond holdings.
Instead of liquidating existing bond positions, a trader could choose a 100 percent inverse bond ETF like the Direxion Daily Total Bond Market Bear 1x Shares ETF (SAGG). If the Bloomberg Barclays US Aggregate Bond Index declines by one percent on any given day, SAGG is designed to increase by one percent.
Bond hedging strategies are not limited to the broader bond market. Inverse performing bond ETFs linked to high-yield bonds and government bonds with varying maturities are readily available from companies such as Direxion and ProShares.
Summary
Assets flooding into bond ETFs is hardly accidental. Year ago, the stage was set by ETF providers offering innovative solutions for fixed-income investors. And these factors have contributed to the surge and popularity of bond ETFs.
Ron DeLegge is founder and chief portfolio strategist at ETFguide.