ETF Trends
ETF Trends

After years of outperforming, the equities market bull rally is running out of steam, with a number of global uncertainties weighing on riskier assets. Consequently, overweight stock exchange traded fund investors may want to consider revisiting the fixed-income theme.

“What does a low-growth world, pricey stock valuations and a more cautious Fed add up to? Expect low returns, spikes in volatility and a need to cast an ever-wider net for yield,” BlackRock strategists said in a research note. “As a result, we’re more cautious on equities and risky assets in general. At the same time, we have upgraded U.S. Treasuries and fixed income overall to neutral.”

BlackRock has downgraded its outlook on U.S. equities to neutral from overweight.

Year-to-date, the SPDR Dow Jones Industrial Average ETF (NYSEArca: DIA) gained 3.5%, SPDR S&P 500 ETF (NYSEArca: SPY) rose 3.0% and PowerShares QQQ (NasdaqGM: QQQ) dropped 3.7%.

Related: Smart Beta and Fixed Income Meet With These New ETFs

Even with the pullback over the first few weeks, U.S. stocks have enjoyed a multi-year run, which pushed equities to elevated levels, hovering around the 70th percentile of their long-term historical range. Moreover, despite the Federal Reserve pushing off an interest rate hike, the equities market may continue to find pressure from difficult-to-forecast events and ongoing weakness in employment growth.

Additionally, BlackRock upgraded its overall fixed-income allocation to neutral from underweight, with a preference for Treasury Inflation Protected Securities over traditional U.S. Treasuries in light of rising inflation expectations.

“We have upgraded U.S. Treasuries and fixed income overall to neutral, and remain cautious on risk assets,” BlackRock added.


ETF investors interested in fixed-income exposure have a number of broad options available. For instance, the iShares Core U.S. Aggregate Bond ETF (NYSEArca: AGG) is one of the largest, cheapest and most liquid investment that tracks the widely observed Barclays US Aggregate Bond Index. AGG’s underlying index includes a broad mix of fixed-rate, investment-grade government, corporate and securitized bonds that are weighted by float-adjusted market capitalization. Consequently, the portfolio tilts towards issuers with the largest debt, so the government and securitized bonds make up the largest chunk of the aggregate bond ETF’s holdings. AGG has a 1.89% 30-day SEC yield.

Related: Jitters Permeate the ETF Bond Market

The Vanguard Total Bond Market ETF (NYSEArca: BND) provides another option to gain exposure to the Barclays U.S. Aggregate Bond Index. BND is the largest ETF to track the benchmark, but the fund provider excludes securities held by the Fed. BND has a 2.04% 30-day SEC yield.

The Schwab U.S. Aggregate Bond ETF (NYSEArca: SCHZ), which also tracks the same index, is the cheapest option available, with a 0.05% expense ratio. However, SCHZ is smaller than its competitors. SCHZ has a 2.09% 30-day SEC yield.

Related: 17 TIPS ETFs to Hedge Against Inflation

For TIPS exposure, investors can look at options like the iShares TIPS Bond ETF (NYSEArca: TIP), Schwab U.S. TIPS (NYSEArca: SCHP) and SPDR Barclays TIPS ETF (NYSEArca: IPE). TIPS returns are affected by interest-rate risk as well as changes in the principal value when the Consumer Price Index moves. TIPS will adjust their principal value upward in response to a higher CPI, but the reverse occurs during periods of deflation.

For more information on the fixed-income market, visit our bond ETFs category.

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.