Historically, fixed income and equity performance moved in different directions, with bonds tending to do well as equities declined, while bonds tended to lag as equity performance improved. That relationship broke down in 2022 as the Fed hiked rates quickly and both equities and fixed income markets posted dismal returns.
More recently, however, markets have normalized, and the correlation between bond and equity markets has returned to more typical negative territory, indicating fixed income markets have regained their traditional role as an offset to equity volatility in a diversified portfolio.
As Figure 1 shows, the rolling 52-week correlation between intermediate Treasuries (IEF) and equities (SPY), which spiked and remained elevated during 2022 and into 2023, has moved back toward its typically negative range, reinforcing fixed income’s ability to once again act as a stabilizing force during periods of equity market stress.
[Figure 1: Rolling 52-Week Correlation — IEF vs. SPY. Correlations spiked/remained elevated for the 2022–2023 period but have slowly regained their traditional low/negative relationship.]
Fixed Income as a Source of Return
Over much of the last decade and a half, investors got used to zero interest rates and very low yields across every fixed income sector. With rates at more normal levels — and the chance of a return to a zero interest rate policy seemingly remote — fixed income once again offers an attractive level of income for investors, with the prospect for that income to be durable over time.
Additionally, even though inflation is above the Fed’s 2% target, we believe it will continue to trend lower. Rates across the curve remain well above the level of inflation, allowing investors to generate a potential reasonable real return over and above the rate of inflation — with the potential for that return to rise further should inflation continue to moderate.
As illustrated in Figure 2, 10-year real yields remain meaningfully positive — a notable departure from much of the post-financial-crisis period when real yields were often negative or negligible — underscoring fixed income’s renewed potential to generate durable income while helping preserve purchasing power.
[Figure 2: 10-Year Real Yields. Real yields are meaningfully positive (highest since pre-Global Financial Crisis) and providing a meaningful source of return in a portfolio.]
Opportunity Set is Key
Traditional fixed income benchmarks only include a portion of the investable universe, with much of that concentrated in high-quality (and hence lower-yielding) government-guaranteed issues. Passive strategies using those traditional benchmarks therefore miss many higher-yielding opportunities that exist outside of those benchmark sectors.
TCW’s fixed income strategies capitalize on our expertise across the fixed income markets to identify and exploit inefficiencies and opportunities in sectors not included in traditional benchmarks — including high yield bonds, bank loans, inflation-protected securities, floating-rate instruments, asset-backed securities, commercial and residential mortgage-backed securities, and non-USD denominated issues — all of which can provide higher yields and differentiated return patterns versus more traditional exposures.
Ability to Capitalize on Volatility
With markets increasingly uncertain, the risk of volatility rises and as that unfolds, portfolios will need to adapt to take advantage of new opportunities and optimize risk exposures. At the same time, with credit spreads historically narrow, rigorous fundamental research and disciplined security selection are necessary to identify issuers who are likely to be more resilient through volatility and provide greater downside protection.
The flexibility to move into undervalued sectors, adjust a portfolio’s risk profile and interest rate exposure, and find issues where yield spreads provide better compensation for risk are likely to be critical factors in investors’ success through 2026.
TCW offers a suite of fixed income ETFs designed to serve as flexible building blocks for advisors seeking to navigate these evolving market dynamics. Our strategies enable advisors to express targeted views on income and sectors, while taking advantage of differentiated opportunities via sector rotation and duration management, without concentrating risk in a single segment of the market. Advisors increasingly need solutions that can be deployed tactically or serve as strategic anchors, depending on portfolio objectives. TCW’s ETFs provide the precision and liquidity advisors need to dynamically position portfolios to generate real income, manage volatility, and respond opportunistically as markets fluctuate.
Flexible Income ETF (FLXR)
An actively managed, multi-sector fixed income ETF focused on generating high current income with a secondary objective of capital appreciation. Invests across investment-grade and high-yield corporates, securitized products, government bonds, and global debt with flexibility to adjust duration and credit exposure as market conditions change. This flexible mandate supports a multi-dimensional positioning approach, allowing advisors to actively balance duration, credit, and global exposure within a single vehicle as market dynamics evolve.
Core Fixed Income ETF (FIXT)
A modern core plus bond ETF designed for advisors seeking portfolio stability, diversification, and active risk management at the center of their fixed income allocation. Emphasizes high-quality core bonds with disciplined risk controls and broad sector exposure to help manage interest rate and credit risk while delivering dependable income. Offers a stable foundation around which advisors can blend complementary strategies — such as dynamic or multi-sector exposures — to navigate evolving market conditions.
AAA CLO ETF (ACLO)
Provides a liquid, transparent way for advisors to access collateralized loan obligations (CLOs) — a structurally protected source of floating-rate income with built-in credit enhancement. ACLO seeks to deliver attractive, rate-responsive income while complementing traditional fixed income allocations through enhanced carry and diversification, particularly in environments where floating-rate exposure is valuable.
Senior Loan ETF (SLNZ)
Designed to provide short-duration, floating-rate income for advisors who want to stay invested while reducing late-cycle interest rate risk. By investing primarily in senior secured loans, SLNZ seeks to offer attractive yield with structural protections relative to traditional unsecured high yield bonds. Its senior positioning and shorter duration profile make it a more defensive way to access credit-related income within a diversified portfolio.
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