For the first time in almost two years, the markets are going it alone. On June 30, the Federal Reserve’s much-maligned second round of quantitative easing (QE2) came to an end. Many believed that the $600 billion money printing program helped drive stocks prices higher, while also resulting in unintended consequences such as rising asset bubbles and a run in commodity prices.

This doesn’t mean the Fed is hitting the brakes on the market. Although the Fed won’t print new money to purchase Treasuries, it will continue funneling the proceeds of maturing debt into Treasury purchases to keep interest rates low. Fed Chairman Ben Bernanke has kept interest rates low in an attempt to stimulate the housing market, business investment and economic activity. He has also sought to shepherd investors toward riskier assets such as stocks.

It’s debatable whether the Fed’s actions have kept the lid on interest rates–10-year Treasury bonds yielded 2.64 percent at the outset of QE2 and that yield has now climbed just above 3 percent. But the quantitative easing program has supported equity prices; the S&P 500 has gained about 45 percent since the start of QE2.

Many fixed-income investors are uncertain about the fate of the market in a post-QE2 world; after all, the Federal Reserve has purchased about 70 percent of Treasury debt issued since November. A number of well-respected investors have lined up on both sides of the trade. Some expect financial armageddon and others foresee business as usual.

On balance, I fall into the latter camp. The end of QE2 could cause the market to lose steam given the weakened state of the US economy. Additionally, it’s unclear who will step into the breach to purchase all those Treasuries. Foreign purchases of US Treasury debt has slowed, which will lead US-based investors to purchase the bulk of the excess debt. However, they will demand greater compensation, pushing rates higher.  

But I wouldn’t suggest making drastic changes to the fixed-income portion of your portfolio based on that expectation. Investors should shorten their duration–a measure of how much the value of your holdings would change in response to a 1 percent move in rates–by adding some shorter-term debt to their holdings. Funds such as iShares Barclays 1-3 Year Treasury (NYSE: SHY), which specializes in government debt, and iShares Barclays 1-3 Year Credit (NYSE: CSJ), which invests in corporate debt, can help you achieve this goal. Adding these two funds to your portfolio will shorten the average duration of your bond holdings to three to four years. This will help you hedge against any major move in bond prices while you realize higher income streams from your longer-term debt.   

What’s New

The end of the month is often slow for new fund launches. Last week saw only one fund hit the market.

Morgan Stanley S&P 500 Crude Oil Linked ETN (NYSE: BARL) provides exposure to large-cap equities and short-term crude oil futures. Tracking the S&P 500 Oil Hedged Index, the fund essentially splits its exposure 50-50 between the S&P 500 and a combination of West Texas Intermediate Light Sweet Crude and ICE Brent Crude Oil futures.

The use of futures means that the exchange-traded note (ETN) is inherently leveraged; each $1 invested is basically worth $2 of investments. The ETN charges and expense ratio of 0.79 percent and could be useful for investors who are bullish stocks but expect oil to garner greater short-term gains.