Investors in such products can do little to avoid the sting of a plummet in the value of bonds brought about by a rising interest rate, whereas investors of individual bonds can mitigate interest rate risk by holding on to a bond until it reaches maturity.
Another risk is that investors are not guaranteed to get their money back because, by and large, bond ETFs never mature.
Mr Cotter said: “Unless you buy a physical bond, the risk of depreciation in bond values is the same as for actively managed bond funds. One of the main concerns with ETF investments centres on liquidity and just how tradable they are.”
When asked how likely they are to consider shorter duration bonds in the next 12 months, more than half (nearly 52 per cent) said they might do, while a third answered very likely and just over 15 per cent said they would not.
Separately, more than three fifths of advisers surveyed said they would consider bond maturities within an absolute return strategy which targets positive returns regardless of market conditions through hedging techniques. The rest said otherwise.
Scott Gallacher, chartered financial adviser at Leicester-based Rowley Turton, said: “These types of products offer low-risk returns, but these returns are not far above those offered in cash. These funds will typically implement derivatives to mitigate interest rate risk. The performance of these strategies does not bounce around a great deal, so they are best suited to the defensive part of any portfolio.”
Myron Jobson is features writer of Financial Adviser
