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Credit Risk Rewarded While Interest Rate Investors Suffer  

January 22, 2014
Maureen Nevin Duffy, Insitutional Investor

ETFs saw corporate bond funds rise and T-bill funds fall. Now seemingly on the upswing: the taste for risk.

Some investors who sought capital preservation last year in bond-holding exchange-traded funds (ETFs) got their reward. But others received a knock on the head. Those willing to take riskier bets did best. The deciding factor, say analysts, owes to differences in the underlying bonds themselves. Fear of rising interest rates sent investors running from long-term commitments, like long-term bonds, whose yields may prove paltry when rates rise. And the prospects of not garnering enough return, coupled with improving credit risk among corporate bonds, lured some investors to higher-risk securities. Flexibility has been key. Unlike individual bonds or mutual funds, ETFs make it easier for investors to shift securities in conjunction with these dynamics. Investors took advantage of that agility by moving out of long-term bond funds as 2013 drew to a close. For the moment, analysts expect investors in 2014 to keep betting on shorter-term investments.

Read more: Institutional Investor

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