Dave Longo, Head of Fixed Income Portfolio Strategists at Dimensional Fund Advisors
Danielle Rutsky, Senior Product Manager, Nasdaq ETP Listings
How is Dimensional thinking about positioning bond portfolios in the current market environment?
Globally, yield curves are generally inverted on the short-end and upwardly sloped in the 10- to 20-year maturity range. As a result, ultrashort bonds and bonds in 10- to 20-year maturity range are attractive when compared to 3- to 10-year bonds or even the long-end of curves. This generally leads us to a barbell approach for our portfolios that maintain a weighted average duration within a range relative to benchmarks.
Furthermore, Japan and Australia’s yield curves are relatively steep when compared to other developed market curves. As such, on a hedged to US dollar basis, we are seeing opportunities in bonds denominated in the Japanese yen and Australian dollar.
When looking at credit spreads, they are relatively narrow. This leads us to a preference for higher rated bonds, generally positioning portfolios below their maximum allowable weight credit/lower rated bonds.
How does the way Dimensional manages fixed income portfolios further set investors up forsuccess?
Many investors are concerned about uncertainty in today’s world. They cite geopolitical risks, central bank activity, political elections, and so on. However, our research finds that markets are resilient in pricing in all relevant information about these types of events. As such, we believe the best approach to managing portfolios is an approach that systematically uses information in security prices. By doing so, it is transparent to investors as to why we are positioned the way we are relative to benchmarks. This transparency, or ability to understand why we do what we do, can lead to a better investment experience.
Dimensional is the industry’s largest active ETF manager with over $140 billion in AUM across38 funds. Could you tell us a bit about your fixed income offering in particular?
Dimensional’s ETF suite is an industry leader in the growing active ETF market. Our fixed income ETFs are a key part of this offering. Our ETFs enable investment professionals to construct full asset allocations across traditional market segments using all Dimensional ETFs. We offer a broad selection of funds to suit different investor needs in both taxable and tax-deferred accounts. We provide ETFs from core portfolios to more component strategies that offer solutions for specific needs, such as inflation-protected strategies, municipal bond funds, and short duration portfolios. All of these solutions build on Dimensional’s legacy of thoughtful, flexible implementation, which offers robust risk management and uses information in market prices to invest in bonds with higher expected returns.
Global bond portfolios are attracting strong flows in 2024, could you explain why global diversification is important in today’s bond market?
Global bonds can be like exploring a new location abroad, as expanding beyond your home country can lead to enhanced experiences. For instance, we find that changes in interest rates for bonds issued in one currency do not necessarily lead to the same interest rate changes in bonds denominated in other
currencies. Global yield curves do not move in lockstep. As a result, a global approach to investing may reduce portfolio volatility relative to just investing in your local market.
Additionally, because global yield curves do not move in lockstep, we find that expected returns also vary across different yield curves. It may be the case that your local yield curve is experiencing lower expected returns relative to a foreign yield curve. As such, global bonds may enhance the opportunity to improve the expected returns relative to an approach that is constrained to investing in one market.
Dimensional Fund Advisors LP is an investment advisor registered with the Securities and Exchange Commission. Consider the investment objectives, risks, and charges and expenses of the Dimensional funds carefully before investing. For this and other information about the Dimensional funds, please read the prospectus carefully before investing. Prospectuses are available by calling Dimensional Fund Advisors collect at (512) 306-7400 or at dimensional.com. Dimensional funds are distributed by DFA Securities LLC.
This information is not meant to constitute investment advice, a recommendation of any securities product or investment strategy (including account type), or an offer of any services or products for sale, nor is it intended to provide a sufficient basis on which to make an investment decision. Investors should consult with a financial professional regarding their individual circumstances before making investment decisions.
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Risks include loss of principal and fluctuating value. Investment value will fluctuate, and shares, when redeemed, may be worth more or less than original cost. Fixed income securities are subject to increased loss of principal during periods of rising interest rates. Fixed income investments are subject to various other risks, including changes in credit quality, liquidity, prepayments, call risk, and other factors. Municipal securities are subject to the risks of adverse economic and regulatory changes in their issuing states. International and emerging markets investing involves special risks such as currency fluctuation and political instability. Investing in emerging markets may accentuate these risks.
ETFs trade like stocks, fluctuate in market value and may trade either at a premium or discount to their net asset value. ETF shares trade at market price and are not individually redeemable with the issuing fund, other than in large share amounts called creation units. ETFs are subject to risk similar to those of stocks, including those regarding short-selling and margin account maintenance. Brokerage commissions and expenses will reduce returns.
ETF assets under management stated as of June 28, 2024.
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