With interest rate cuts likely from the Fed in 2007, S&P is boosting the recommended exposure to bonds and going out longer term.
The Standard & Poor’s Model ETF Portfolio has a new fixed-income allocation to reflect a decision by our Investment Policy Committee (IPC) to increase the bond portion of its overall asset allocation to 25% from 20%, while reducing the recommended cash exposure to 15% from 20%.
As a result, the Model ETF Portfolio’s U.S. debt exposure, which is represented by the iShares Lehman Aggregate Bond Fund (AGG), will rise to 20% from 10%. The U.S. short-term debt component, the iShares Lehman 1-3 Year Treasury Bond Fund (SHY), will be reduced to 5% from 10%.
“In light of the weakening macroeconomic environment, we believe increasing the fixed-income allocation is prudent, with an emphasis on lengthening the average maturity and duration,” says Alec Young, equity market strategist at S&P.
Similarly, the cash portion of the Model ETF Portfolio, represented by U.S. six-month Treasury bills, now accounts for 15% of assets.
The Model ETF Portfolio’s exposure to equities remains unchanged: 40% U.S. stocks and 20% foreign issues.
The IPC says the increased bond exposure should serve as a hedge against weaker-than-expected U.S. economic growth and the probability that the Federal Reserve will begin easing short-term interest rates next year. S&P expects 2007 U.S. real GDP growth to slow down to 2.3% from the 3.4% forecast for 2006, primarily because of a cooling housing market.