Bond exchange traded funds still have a place in a diversified portfolio for the current market environment, as the lingering effects of the coronavirus pandemic could still throw a wrench into the global economy.
The risk-off attitude and pullback in the equities market on Tuesday came after weaker-than-expected retail sales numbers and growing concerns over infection rates of the Covid-19 delta variant.
According to the Commerce Department, retail sales that reflect purchases at stores, at restaurants, and online declined by 1.1% in July month-over-month, compared to expectations of a 0.3% dip, the Wall Street Journal reports.
“The Delta variant has hit the confidence of the average American, so we need to watch that for ripple effects on the economy,” David Donabedian, chief investment officer at CIBC Private Wealth, told the WSJ. “This is going to be a chronic issue causing some volatility in markets.”
The spread of the delta variant has raised doubts that businesses will be able to rebound as quickly as previously expected, fueling a shift toward more defensive plays.
“The US 10-year is here for a reason. The global economy has slowed/is slowing. The virus has renewed global supply chain issues. They are real. China is locking down, and the US consumer is showing signs of hesitancy as we get ready to reopen schools,” Gregory Faranello, head of U.S. rates at AmeriVet Securities, said in a report, according to Reuters.
Investors looking to strengthen their fixed income portfolio can consider the Avantis Core Fixed Income ETF (AVIG), which invests in a broad set of debt obligations across sectors, maturities, and issuers. AVIG pursues the benefits associated with indexing, such as diversification and transparency of exposures. Yet, the fund also has the ability to add value by making investment decisions using information embedded in current yields.
The Avantis Short-Term Fixed Income ETF (AVSF) also invests primarily in investment-grade quality debt obligations from a diverse group of U.S.- and non-U.S. issuers with a shorter maturity.
Additionally, the actively managed American Century Diversified Corporate Bond ETF (NYSEArca: KORP) invests in U.S. dollar-denominated corporate debt securities issued by the U.S. and foreign entities but may also hold securities issued by supranational entities. Up to 35% of the fund’s net assets may be invested in high-yield securities or junk bonds. The fund may also invest in derivative instruments such as futures contracts and swap agreements. The weighted average duration of the fund’s portfolio is expected to be between three and seven years.
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