Bond exchange-traded funds can play two main roles in client portfolios — diversification and income — and advisors may choose from various strategies for including them, Todd Rosenbluth, VettaFi research head, noted this week.
Bond ETFs provide diversification in broad portfolios, often — although not always — moving in opposite directions as stocks. As for income, Rosenbluth told ThinkAdvisor on Wednesday, "Most bond strategies are yielding 4% or higher. And so for many investors … bond ETFs can provide stable income.”
So what specific strategies can advisors use in integrating bond ETFs in client portfolios?
“Many advisors that are using bond ETFs are likely starting with a low-cost core investment-grade strategy,” Rosenbluth said, citing choices like the iShares Core U.S. Aggregate Bond ETF (AGG) or the Vanguard Total Bond Market Index Fund ETF (BND).
“Both of those are extremely low priced. They own investment-grade corporate bonds and Treasury securities, primarily relatively stable, relatively appealing yield. That's probably the starting point for many investors,” the ETF analyst explained.
“From there, they can either take on more risk in exchange for higher income potential or take on less risk as typically a trade-off for less income. So they could focus on short-term Treasury products if they were concerned about the economy and concerned about the developments that are going on in the market,” Rosenbluth said.
He cited the iShares Short Treasury Bond ETF) (SHV) as an example.
For those wanting to take on more risk than AGG, he added, clients could own higher yielding ETFs focused on intermediate corporate bonds or high-yield bonds, Rosenbluth added.
He mentioned the Vanguard Total Corporate Bond ETF (VTC), an investment-grade, intermediate-term corporate strategy, as an example, and the iShares Broad USD High Yield Corporate Bond ETF (USHY), which invests in speculative bonds.
Choosing an active manager to determine where the opportunities are, and where risk is likely to be rewarded, is another alternative, Rosenbluth said, citing the Fidelity Total Bond ETF (FBND).
It’s also increasingly common to see advisors build bond ladders — bonds with sequential maturity dates — to help clients with a clear maturity, he said. Invesco and iShares both have index-based ETF products and State Street has an actively managed, target maturity corporate bond strategy, Rosenbluth noted.
The bond selloff that accompanied the stock downdraft last week was atypical, according to Rosenbluth, who explained that not every investment will perform the same in every cycle.
“I think people who were considering having a healthy weight towards bonds should continue to do so despite what happened in the past week, because historically bonds have provided strong diversification and income,” he said.
“Bonds typically are a safer alternative for investors. So I think that there's risk to the U.S. economy and there's risks to the global macro economy that bonds can help offset … but it's still an investment and so there's still risk that's involved,” the research analyst added.
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