The low-rate environment and dissipating volatility are bolstering stocks. However, exchange traded fund investors may want to think about hedging against another shakeout in the equities market with safer assets like Treasuries.
Currently, the equities market is benefiting from the recent dip in interest rates, which continued last week as yields on benchmark 10-year Treasuries dipped to 2.03%, writes Russ Koesterich, Global Chief Investment Strategist and Head of the Model Portfolio & Solutions Business at BlackRock.
“Unfortunately, the gains have not been driven by signs of economic improvement, firming inflation or rising earnings,” Koesterich said. “Instead, investors are once again taking solace in low rates and benign monetary conditions, which can and probably will persist for the remainder of the year. But that can only take the market so far.”
Meanwhile, we are seeing that longer-duration bonds have once again shown to be an effective hedge to equity market risks, bolstering portfolios as stocks plunged in recent weeks.
“The 90-day correlation between the S&P 500 and the 10-year Treasury is once again significantly negative,” Koesterich added. “As investor fears have gravitated back to the economy, and away from an unfounded fear of the Fed, it is likely that the correlation will stay negative for the foreseeable future. The implication is that long-term bonds, which may not offer much income, can help provide an effective hedge in equity-heavy portfolios.”
Consequently, stock-heavy investors may want to revisit Treasury bond ETFs as a potential hedge that will zig when stocks zag.
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).
While the S&P 500 Index declined about 3.8% over the past three months, IEF rose 3.3%, SCHR gained 2.2%, VGIT added 2.1% and ITE was up 1.4%.
IEF has a 7.62 year duration and a 1.80% 30-day SEC yield. SCHR has a 5.2 year duration and a 1.39% 30-day SEC yield. VGIT has a 5.2 year duration and a 1.40% 30-day SEC yield. ITE has a 3.83 year duration and a 1.04% 30-day SEC yield.
For more information on Treasuries, visit our Treasury bonds category.
Max Chen contributed to this article.