While the markets brace for Treasury yields to turn from the three-decade low and prices to pullback, fixed-income exchange traded fund investors shouldn’t automatically head for the exits.
According to the Vanguard Group, investors should not overweight cash and forgo fixed-income assets even as interest rates rise and bond prices fall, reports Jason Kephart for InvestmentNews. Interest rates and bond prices have an inverse relationship.
As the benchmark 10-year Treasury yield rose to 2.5% from 1.66% in May, money market funds gained $64 billion in assets. In contrast, $66 billion was pulled out of bond funds since the start of May. [Bond ETFs Could Shock Pundits In The Months Ahead]
The Barclays U.S. Aggregate Bond Index has dipped 2.2% year-to-date with rates rising. However, while switching over to cash can help maintain your wealth, investors will miss out on the yields. [Fixed-Income ETF Strategies for the Baby Boomer Generation]
“The biggest challenge with moving to cash is, you’re expecting to time interest rates better than everyone else out there,” Chris Phillips, a senior investment analyst at Vanguard, said in the article. “We’ve found pretty consistently over time that the vast majority of active bond portfolio managers can’t even do it. If you’re an adviser, without the same tools, that’s a huge hurdle to overcome.”