Bond ETFs: What Happens If the Bubble Bursts?

July 27th at 11:00am by Tom Lydon

images For months now, there’s been speculation that bonds and bond exchange traded funds (ETFs) are floating in a bubble that’s just waiting to burst. If this is the case, you do have recourse.

Conventional wisdom may say that bonds are so high now that there’s only one direction left. Dividends4Life on Seeking Alpha notes some recent headlines when it comes to bonds – that stocks have underperformed long-term Treasuries, the Treasury bond rally has been petering out and Washington’s influx of cash could send prices to the floor while yields soar.

For the income investor, though, it should matter little. So, what should you do?

1. Don’t give up on stocks. Just because recent numbers have shown that bonds have outperformed in various time frames doesn’t mean that you should shun them altogether. The key practice in an asset allocation model leads to bonds and stocks working well together to help reduce overall volatility in a portfolio. Basically, those investors who were invested in bonds during the market crash did better off than those who were entirely in stocks.

2. Explore longer-term bonds if you’re the type of investor who favors stability of income, write John Y. Campbell and Luis M. Viceira in a report for the National Bureau of Economic Research. Consider bond ETFs, too. They can give an investor broad exposure at a low cost. Some funds Dividends4Life is considering include:

  • Vanguard Long Term Bond ETF (BLV): yields 5.37%

  • iShares Barclays Aggregate Bond (AGG): yields 4.28%

  • iShares iBoxx $ Investment Grade Corporate Bond (LQD): yields 5.49%


For more stories about bonds, visit our bond category.

For full disclosure, Tom Lydon’s clients own shares of LQD.

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.