Fixed-income investors may consider smart beta bond ETFs as a suitable alternative that could make up the shortcomings of traditional bond index funds.

On the recent webcast, The Fed, Factor Investing and Fixed Income, Martin Kremenstein, Senior Managing Director and Head of ETFs at Nuveen, warned that fixed-income investors should expect some changes in the months ahead.

For instance, the Federal Reserve will likely begin unwinding its portfolio of Treasury and mortgage-backed securities to shrink its enlarged balance sheets, which would put moderate upward pressure on long-term rates. Nuveen also expects the Fed to hike rates in December, followed by two more rate hikes in 2018, and anticipate yields on benchmark 10-year Treasury notes to climb back to 2.45% by year-end.

Joshua Jenkins, Portfolio Manager for CLS Investments, also pointed out that equity valuations appear stretched, which may open up short-term opportunities in fixed-income assets as bond returns have historically exhibited an inverse correlation to equities during periods of heightened volatility or periods of drawdowns in the stock markets.

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