Even as interest rates move offt heir three decade low and begin to hurt fixed-income assets, investors should not forget that bonds and related exchange traded funds still help diversify an investment portfolio and diminish overall volatility.
“For the folks who are really trying to find noncorrelated and less volatile investments, bonds fit that profile, and people own bonds because there is some kind of financial plan, whether it is stated or not,” J. Brent Burns, president of Asset Dedication LLC., said in an InvestmentNews article.
As interest rates begin to climb off their record lows and bond prices declined – yields and bond prices have an inverse relationship, investors should not become too trigger happy for alternatives to bonds.
“The question I always ask is, if not bonds, then what?” Chris Philips, a senior analyst in the investment strategy group at The Vanguard Group Inc., said in the article.
For instance, dividend-paying stocks have become a popular income generating alternative, along with emerging market debt, commodities, real estate investment trusts and high-yield bonds.
“If you are moving out of bonds into something else, all of those other strategies come with different and potentially greater risk than the bonds you are leaving,” Philips said. “The minute you try to replace fixed income with stocks, they will start performing like stocks because stocks never are and never will be bonds.”
While there is nothing wrong with squeezing out a little more return through alternative assets, analysts and advisors are concerned that investors are taking on greater risk.
“We’ve seen over the past couple of years a lot of investors moving out of traditional fixed income and into things that have increased duration exposure and interest rate exposure,” Philips added. “If you’re making that move out of bonds and into stocks, you better expect tremendous volatility.”
For more information on fixed-income assets, visit our bond ETFs category.
Max Chen contributed to this article.