Inflation fears may have dissipated in July, but the recession narrative is growing. As such, investors are focusing on bonds once again as a safe haven escape if economic growth suffers from rising interest rates.
To start the first half of the year, both stocks and bonds were faltering amid inflation fears, but the latter could be diverging into more upsides while the former trends lower. Too much optimism could be mounted in what could be nothing more than a bear market rally.
“What we’ve seen at this juncture is a bear market rally and we don’t want to chase it,” said Wei Li, global chief investment strategist at BlackRock Inc, in a Bloomberg article. “I don’t think we’re out of the woods with one month of inflation cooling. Bets of a dovish Fed pivot are premature and earnings don’t reflect the real risk of a U.S. recession next year.”
Getting bond exposure is available with active exchange traded funds (ETFs) that give investors dynamic flexibility in the bond markets. One option to consider for corporate bonds is the American Century Diversified Corporate Bond ETF (KORP), which offers investment-grade quality debt holdings.
The fund seeks current income by emphasizing investment-grade debt while dynamically allocating a portion of the portfolio to high yield. Per its product website, KORP creates a systematically managed portfolio that integrates fundamental and quantitative expertise that:
- Adjusts investment-grade and high yield components to balance interest rate and credit risk.
- Screens individual credits to seek those with sound fundamentals, reduced default risk, attractive valuations, and liquidity.
- Adjusts industry and duration exposures as risks and opportunities emerge.
A Muni Bond Option
Municipal bonds are also another option, giving investors fixed income that’s free from federal taxes. Also using an active management strategy, a fund to consider is the American Century Diversified Municipal Bond ETF (TAXF).
The fund seeks to provide consistent tax-free income by employing an active, research-driven process that draws from across the municipal bond universe and adjusts exposure depending on prevailing market conditions. As with local government bonds in the U.S., credit risk is minimized with close to 80% of the fund ranging in debt rated at AAA to A (as of May 31).
Both funds also feature a low expense ratio of 29 basis points. This should appeal to cost conscious investors who may typically view actively managed funds as too expensive to consider.
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