Investors betting on falling interest rates – or rising Treasury bond prices – have flooded into the iShares 20+ Year Treasury Bond , sending it up over 15% year-to-date. Nevertheless, Doug Hedley, CIO of Paritas Capital Management, prefers the iShares 7-10 Year Treasury Bond for his portfolio because it has less risk. ‘You can look at some of the shorter term plays or obviously go out longer to TLT, but I think you run into some interest rate risk should we get a back-up in rates,’ said Hedley. Paritas operates a globally diversified, quantitatively-driven and risk-weighted portfolio called Alpha Foundations that invests in exchange traded funds (ETFs). The portfolio is rebalanced every 30 days. Hedley also owns the Utilities Select Sector SPDR ETF in his portfolio. The XLU has had a great run in 2016, rising almost 20%. But Hedley said he is not going to seriously reduce the position until he sees a step-up in volatility in his model. ‘We are not going to look at changing it just because the position is up substantially,’ said Hedley. ‘If that changes, however, and we see a lot of volatility in XLU before the end of the month then you may see that allocation go down.’ Similarly, Hedley holds the Consumer Staples Select Sector SPDR ETF , up over 8% thus far in 2016. ‘We’ve had volatility come down in the equity markets, but currently XLU and XLP have much better risk profiles than some of the other sectors in the market,’ said Hedley. Finally, the Vanguard REIT ETF is up almost 15% thus far in 2016. ‘VNQ represents a very low correlated asset in the portfolio, which we like to have,” said Hedley. ‘In fact, if everything in your portfolio is going up at the same time, then you are not very well diversified.’
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