Registered investment advisors looked for safety in their exchange traded funds in 2011, but this year they may be willing to take on more risk in the fixed income sector, said Charles Schwab & Co. analysts in an ETF update on Friday.
“We saw that Treasurys outperformed corporate bonds in 2011,” said Kathy Jones, a fixed income strategist in the Schwab Center for Financial Research. “This year, with more positive news out of Europe, people are taking on more risk and are not so interested in Treasurys.”
Last year, utilities outperformed the financial and banking sector, but this year, financials offer attractively high yields relative to safer sector bonds, Jones said.
She advised against investors taking on too much risk in municipal bonds, however, warning that a drop in quality is less likely to pay off in munis.
Jones also encouraged investors to start moving cash back into the market.
“If you have a lot of money sitting in cash, there’s a high cost to waiting on the sidelines,” she said. “You’ll have to take more risk to catch up. Our theme is that it’s time to start catching up.”
Beth Flynn, Schwab’s vice president and head of third-party ETF platform management, noted that strong RIA inflows headed toward Treasurys for safety in 2011, while higher-risk fixed income ETFs are more promising for yield in 2012.
Investors looking for a fixed-income ETF equivalent to an S&P 500 stock index fund should check out the Barclays Capital US Aggregate Bond index, according to Michael Iachini, managing director of ETF Research at Charles Schwab Investment Advisory.
“There are a few reasons why ETFs are attractive for investors, and the first is diversification,” Iachini said. “Compared to bond mutual funds, ETFs mostly track indexes, so they are lower in cost, but you should know what you’re buying and understand how it’s built.”
To be sure, investors’ interest in bonds is growing. Companies have sold $44.2 billion of both high- and low-rated corporate bonds so far this year, the highest on record for the time period, according to data provider Dealogic, and The Wall Street Journal reported on Friday that the floodgates have opened in the corporate-bond market.
“Investors are snapping up bonds from the likes of Macy's Inc. and Toyota Motor Corp., pushing the cost of borrowing for some issuers to record lows,” The Journal reported. “Companies are capitalizing on the relative lull in markets following a tumultuous 2011, as bond investors seek yields that are higher than those on Treasurys.”
Read ETF Appetite Increasing by ETFguide.com’s Ronald DeLegge at AdvisorOne.com