ETF investing has been gaining in popularity with everyday investors. So what exactly is an ETF?
TIOA: There Is Other Alternatives
Bonds have become more attractive at current yields. We see bonds reemerging in investors portfolios as increased equity risk spooks investors into 2023.
Investors have frequently used the phrase TINA (There Is No Alternative) to be pro equites over bonds. And with good reason. Throughout much of the last five years, treasury bonds have yielded a measly 0.5% on the low end to 3% on the high end.
As a result, investors often sought yield elsewhere and the 60/40 portfolio split (60% of equity and 40% of bond exposure) was abandoned in favor of increased equity exposure. Investors began rotating into overweight equity positions, utilising dividends as a proxy to yield.
Enter 2022. The US 10-yr yield is now hovering around 3.7%, and GIC rates are similarly priced in the 3-4% range. For the first time since 2009, investors have the ability to park money back in safe assets and expect reasonable yield for doing so.
In early 2022, institutions rebalanced portfolios in favor of increased equity exposure at the expense of fixed income. Given the weak equity markets and recessionary fears, we expect institutional investors to reallocate back into fixed income throughout the latter parts of 2022 into 2023. This should aid in bond price recovery.
Bonds Are Bottoming
Let's take a look at bond performance. In the chart below, we analyse TLT - the iShares 20yr+ Treasury Bond ETF. When rates spike (like they are now), bond prices trade inverse and sell-down.
With that, TLT is back down to 2014 levels and showing signs of a bottoming process - where RSI (a technical indicator) sees a series of higher-lows despite price continuing lower. This often prefigures a bottom.
Bonds vs Equities
Similarly, when comparing TLT to SPY (SPDR S&P 500 ETF), positive divergences are also forming. This suggests near-term outperformance of bonds over equities. It is worth noting, bonds typically underperform equities in the long-run, highlighted by the long-term lower highs in the chart below.
Popular Bond ETFs
So this begs the question, how can you gain exposure to bonds?
Fixed income ETFs can offer a lower cost, increased diversification and better liquidity vehicle to park your money vs owning bonds directly.
In fact, that's how institutional investors are gaining access. A survey of institutional investors collected by State Street saw professional managers prefer to gain fixed income exposure through ETFs rather than purchasing bonds directly. Mainly due to liquidity benefits.
The table below highlights some popular fixed income ETFs to investigate. You are welcome to use our new ETF screener linked here on Investipal for more information on these funds as well as model out how they complement your portfolio.
With that all said, the appetite for a more normalised portfolio is increasing - one that is not solely constructed of stocks. Creating a portfolio constructed of equities, fixed income and other alternatives diversifies your risk and can help hedge against further market volatility.
With yields becoming reasonable for the first time in a decade, it is worth considering how fixed income fits within your portfolio going forward.