Did you know that the fixed income market is twice the size of equities (in terms of the number of securities to choose from)?1 Let’s take a closer look at some of the more common types of debt investments and which motifs they appear in.
The United States Department of the Treasury issues what many consider to be the least risky type of bonds: Treasuries. A range of them appear in the motif called U.S. Treasury Ladder. The name refers to the four different tiers of maturity dates of the bonds held by the exchange traded funds in the motif.
The Inflation motif contains ETFs that hold Treasury Inflation-Protected Securities (TIPS), along with international equivalents. TIPS are inflation-indexed bonds that have a constant coupon rate, but the principal amount adjusts with changes in inflation.2
Debt issued by states, cities or other local government entities are commonly known as munis. These debt instruments help finance municipal activities and projects. Interest payments on munis are typically exempt from federal taxes, although some income may be subject to alternative minimum tax (AMT). Certain munis may also be exempt from state taxes when purchased by residents.
Agency Bonds and Mortgage-Backed Securities (MBS)
ETFs holding agency bonds and MBS account for 25 percent of the weight in the American Bonds motif.
This type of debt is issued by financial services organizations created by the U.S. Congress that are not guaranteed by the U.S. government. These types of bonds are typically low risk and often backed by underlying fixed income assets (in which case they are called asset backed securities). Well known examples of agency issuers include Fannie Mae and Freddie Mac, both of which issue MBS, which are bonds secured by mortgages.
Investors consider corporate bonds riskier than munis, agency bonds and Treasuries due to competitive forces. Bonds issued by companies with high credit ratings are referred to as investment grade or high grade, rated BBB and higher.
Corporate bonds typically have maturities of one year or longer. Corporate debt with maturities under a year is known as commercial paper.
Exposure to this category of debt can be found the Corporate Bonds motif. It’s comprised of ETFs that hold both investment-grade and high-yield corporate bonds, spanning diverse maturities.
Corporate debt instruments issued by businesses with high risk of default are referred to as non-investment grade, speculative grade, or junk bonds—but the most common term used is high yield. These bonds pay higher-than-average interest in order to compensate for their greater risk.
More Fixed Income Motifs
Some of our fixed income motifs include more than one type of bond ETF. These include:
• Fixed Maturity Ladder: This motif is designed to provide low-cost bond ETFs with diverse maturities and risk ratings, including investment-grade corporate, high-yield corporate, AMT-free and municipal debt.
• Floating-Rate Bonds: This portfolio provides exposure to ETFs that hold debt with interest rates that change periodically.
• International Bonds: This motif contains ETFs holding a variety of debt issued within both developed and emerging markets.
• Deflation: This motif contains ETFs holding long-duration U.S. Treasuries, munis and investment-grade corporate bonds.
Altogether, there are 11 different fixed income motifs to choose from. To learn more, sign up for a free account today.
The Exchange Traded Funds prospectus contains its investment objectives, risks, charges, expenses and other important information you should read and consider carefully prior to making an investment decision. Please review the current prospectus, available from the Prospectus link.
ETFs have unique features that you should be aware of, which can include distribution of any gains, risks related to securities within the portfolio, and tax consequences. The data quoted herein represents past performance and is not indicative of future results. The investment return and principal value of an investment will fluctuate so that your investment, when redeemed, may be worth more or less than their original value. Current performance may be lower or higher than the performance data provided. Please review the prospectus or other research tools provided on this site for more recent performance information. Contact Motif Investing at 1-855-586-6843 to obtain the most recent month-end performance data.
Fixed income investments are subject to various unique risks, including changes in credit quality, market valuations, liquidity, prepayments, early redemption, corporate events, tax ramifications, and other factors. Fixed income securities are subject to increased loss of principal during periods of rising interest rates. If you need further assistance, please contact your financial advisor, accountant, or estate planner.