More investors are dabbling in tactical or alternative fixed-income options in anticipation of a rising interest rate environment or overweighting equities all together. However, you shouldn’t neglect core, intermediate-term bonds and related exchange traded funds.
The intermediate-term bond fund space is a good starting point for investors seeking a sort of ballast to balance out their equity position, reports Christine Benz for Morningstar. However, Benz warns against messing around with some of the noncore categories.
“Right. I think the most important thing is that, especially when you get into those noncore categories, so many of them have equity sensitivity–high yield, etc.–and it doesn’t mean that you don’t want that, maybe you do,” Eric Jacobson, a senior analyst for active strategies for Morningstar, said in the article “But if you strip out all the rate sensitivity by getting rid of your intermediate-term bond funds or government funds, at that point, you’ve taken away an insurance policy.”
For instance, investors can consider investment-grade, intermediate-term Treasuries, corporate bonds, or both.
The iShares 7-10 Year Treasury Bond ETF (NYSEArca: IEF) provides access to intermediate Treasury bonds, with a 7.56 year duration and a 2.13% 30-day SEC yield.
Jacobson points out that during the third quarter of 2011 and in 2008, the only things that performed well were U.S. Treasuries.
Additionally, the iShares iBoxx $ Investment Grade Corporate Bond ETF (NYSEArca: LQD) focuses on investment-grade corporate debt. The fund shows a 7.76 year duration and a 3.07% 30-day SEC yield. The iShares Intermediate Credit Bond ETF (NYSEArca: CIU) tracks high-quality corporate and non-corporate bonds with credit ratings BBB and above. The ETF has an effective duration of 4.25 years and a 1.98% 30-day SEC yield.
These types of high-quality, intermediate assets act as an insurance policy. Many have thought about shifting toward shorter term bonds, but if an investor is heavy on equities and short-term bonds, your overall portfolio is susceptible to short-term volatility and potential spikes in safe-haven demand. Consequently, Jacobson advises investors to keep some intermediate positions.
“The one time that you are really going to need it, if it’s not there, everything is going to go down at the same time,” Jacobson added.
For more information on investing with ETFs, visit our ETF 101 category.
Max Chen contributed to this article. Tom Lydon’s clients own shares of LQD.