Bond ETFs to Weather a Political Storm

U.S. equities typically don’t do well in an election year as the political uncertainty helps fuel market volatility. Instead, exchange traded fund investors may be better off sticking to more conservative investment-grade fixed-income assets.

”If a candidate with radically different ideas came into office, it would be an environment where the market would have difficult time assessing what impact that would have on the economy,” Tracie McMillion, head of global asset allocation strategy for Wells Fargo Investment Institute, told InvestmentNews.

Republican candidate Donald Trump and Democratic runner Bernie Sanders both led their respective primaries, revealing investors’ desire to change up the status quo and adding to uncertainty.

McMillion found that domestic large-cap stocks typically experienced “much higher” returns on average when an incumbent is running in a re-election year, but during “open” election years, stock gains only averaged 1.15%.

On top of the open elections this year, markets are weighed down by a number of other negative factors, including concerns over global economic growth, a collapse in oil prices, a multi-year rally that is running out of steam and a Federal Reserve that is contemplating higher interest rates.

Consequently, Wells Fargo argues that people should diversify to help hedge against the volatility, advising investors to use investment-grade bonds to stabilize their portfolios.

ETF investors can gain broad exposure to investment-grade debt through a number of options.

For instance, ETF investors can choose from a number of Treasury bond-related funds, including the iShares 7-10 Year Treasury Bond ETF (NYSEArca: IEF), Schwab Intermediate-Term U.S. Treasury ETF (NYSEArca: SCHR), Vanguard Intermediate-Term Government Bond ETF (NYSEArca: VGIT) and SPDR Barclays Intermediate Term Treasury ETF (NYSEArca: ITE). IEF has a 1.63% 30-day SEC yield, SCHR has a 1.34% 30-day SEC yield, VGIT has a 1.36% 30-day SEC yield and ITE has a 1.11% 30-day SEC yield.

For a little more income generation, investors can loook to investment-grade corporate bond exposure, including the iShares iBoxx $ Investment Grade Corporate Bond ETF (NYSEArca: LQD), Vanguard Intermediate-Term Corporate Bond ETF (NYSEArca: VCIT) and SPDR Barclays Intermediate Term Corporate Bond ETF (NYSEArca: ITR). LQD has a 3.73% 30-day SEC yield, VCIT has a 3.58% 30-day SEC yield and ITR has a 2.91% 30-day SEC yield.

Fixed-income investors can also consider broadly diversified bond ETFs that hold a basket of various investment-grade debt. For instance, the iShares Core U.S. Aggregate Bond ETF (NYSEArca: AGG) is one of the largest, cheapest and most liquid ETFs that tracks the widely observed Barclays US Aggregate Bond Index, which include investment-grade Treasuries, pass-through MBS, industrials, financials, agency, utilities and CMBS. AGG has a 2.07% 30-day SEC yield.

Max Chen contributed to this article.

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