The widely observed Bloomberg US Aggregate Bond Index is down 14.15% year-to-date. Thank the Federal Reserve and its six interest rate hikes for that.
Making matters worse is the fact that the “agg” is falling in unison with broader equity benchmarks, indicating traditional diversification strategies are failing investors this year. That’s unusual because aggregate bond indexes rarely slide along with stocks. After all, bonds are supposed to be safe havens.
Compounding those woes is the fact that Treasury Inflation-Protected Securities (TIPS) – bonds designed to protect investors from inflation – are sagging as well.
“The reason: inflation that has far exceeded economists’ expectations, leading the Federal Reserve to hike interest rates much more sharply than expected. At long last, TIPS would have their moment! Their inflation protection would now show its value,” notes Morningstar’s John Reckenthaler. “Not hardly. TIPS have performed disastrously, barely outdoing the traditional Treasuries that they were designed to thrash, should inflation appear.”
Translation: It’s been a treacherous year for fixed income investors, but with all the big yields floating around the bond market, opportunity could be beckoning with bond exchange traded funds. Here are a few to consider.
SPDR Nuveen Municipal Bond ESG ETF (MBNE)
The SPDR Nuveen Municipal Bond ESG ETF (MBNE) is a new addition to the bond ETF fray having debuted in April, but it could prove to be well-timed new ETF because more money managers and everyday investors are clamoring for access to ETFs that combine bonds with environmental, social and governance (ESG) virtues.
Adding to the allure of MBNE is the fact that municipal bonds are currently unusually high by historical standards, which belies the strong fundamentals currently available in this corner of the bond market. Those include exceptional state and local tax collection rates, which support municipalities’ debt obligations.
“With unemployment still running at historically low rates, state and local governments have also been collecting more revenue from income taxes and property taxes. Many municipalities have used this extra cash to build up their reserves, which should help cushion the blow if a weaker economy leads to lower tax revenue,” notes Morningstar analyst Amy Arnott.
VanEck Moody’s Analytics IG Corporate Bond ETF (MIG)
Investors looking for a fixed income strategy with a value tilt, which is somewhat unique in this space, may like the VanEck Moody’s Analytics IG Corporate Bond ETF (MIG). MIG follows the MVIS Moody’s Analytics US Investment Grade Corporate Bond Index and focuses on two principles corporate bond investors are likely to appreciate: Value and a reduced probability of downgrade.
Consider what MIG is offering fixed income investors today: An investment-grade portfolio with reduced downgrade risk and a 30-day SEC yield of 5.98%. That’s a potentially alluring combination.
“We define attractively valued bonds as those offering significant ‘excess spread’ above ‘fair value,’ meaning they offer a market spread that is greater than what’s needed based on the actual embedded risk,” according to VanEck research. “Moody’s Analytics calculates proprietary credit metrics to determine fair value. Moody’s Analytics is the pioneer in credit risk modeling, and is relied upon by hundreds of institutions globally for portfolio risk management and decision-making.”
IQ MacKay ESG Core Plus Bond ETF (ESGB)
The IQ MacKay ESG Core Plus Bond ETF (ESGB) can function as an alternative to traditional aggregate bond strategies while providing fixed income investors with the highly sought after ESG overlay. Plus, the $239.2 million fund is actively managed so there are avenues for mitigating interest rate risk. ESGB could also be a bond ETF rebound candidate.
“It’s rare for high quality fixed income investments to have negative total returns over a 12-month period,” noted Charles Schwab’s Cooper Howard. “For example, since 1976, there have only been 65 instances out of 550 total where the broad fixed income index was down over a 12-month period. That’s just shy of 12% of all instances. It’s even more rare for both stocks and bonds to be down at the same time over a 12-month rolling period.”
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
Todd Shriber
Todd Shriber got his start in financial markets as a reporter with Bloomberg News. Later, he became a trader at a Southern California-based long/short hedge fund where he specialized in trading sector and international ETFs leading up to and during the financial crisis. He would later become the web editor at ETF Trends. Currently, he analyzes, researches and writes on ETFs for a variety of Web-based publications and financial services firms.Shriber has been quoted in the Barron's, CNBC.com and the Wall Street Journal. His work has been published on Web sites such as Benzinga, ETF Daily News, ETF Trends, MarketWatch, Fox Business and Nasdaq.com.
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