There have been a slew of articles already in 2013 warning investors who have piled into fixed-income funds about the dangers of rising interest rates. Yet there are steps ETF investors can take to protect themselves from higher yields and lower bond prices.
For example, some experts are advising fixed-income investors to take shelter in high-yield bonds, bank loans and emerging market debt.
“Wall Street is in the process of turning one of its most plain vanilla investments – and one that average investors have flocked to in recent years because of its perceived safety – into ticking time bombs,” Fortune said in a recent story on bond funds. “Many market gurus say that this may finally be the year that interest rates, which have been at historic lows, march up.”
Bond prices and rates move in opposite directions.
“We’re going to have a bond bear-market, like the bear market in stocks. This will be the most predicted train wreck in history,” Art Steinmetz, chief investment officer at OppenheimerFunds, tells MarketWatch.
But the timing of this reversal is not predictable. That’s one reason why Steinmetz is not an outright bond bear, according to the report. He’s still comfortable with credit risk, but is being extremely selective about the types of bonds he’d keep in a portfolio. [Will the Bond ETF Bubble Burst in 2013?]
“People are loaded to the gills with super-safe investments and they’re not recognizing that the definition of ‘super-safe’ has changed,” Steinmetz said in the MarketWatch story.
He recommended investors look to bond sectors that have some cushion or pay high yield.
One area is junk bond ETFs such as iShares iBoxx $ High Yield Corporate Bond Fund (NYSEArca: HYG) and the SPDR Barclays High Yield Bond ETF (NYSEArca: JNK).