Not surprisingly, the Federal Reserve on Wednesday revealed an interest rate increase of 75 basis points — its fifth such move this year. Some market observers are forecasting another 75 basis points hike in October followed by a 50 basis points hike in December.
The “fun” doesn’t stop there. Prevailing wisdom now includes at least 50 basis points of rate increases through the first quarter of next year. In other words, investors are right to be concerned about bonds and fixed income exchange traded funds.
However, some experts believe now isn’t the time to abandon bond ETFs outright. For investors seeking the combination of bonds and environmental, social, and governance (ESG) principles, it could be a good time to evaluate ETFs such as the IQ MacKay ESG Core Plus Bond ETF (ESGB).
The actively managed ESGB answers the income call, which is one of the primary reasons investors should be judicious when it comes to possibly dropping bond ETF allocations.
“What’s fixed income without the income? Investors can use bonds to seek income as most bonds make payments, known as a coupon, to bondholders on a regular schedule. Since the Federal Reserve started raising interest rates, bonds can potentially provide more income; the yield on the 10-year U.S. Treasury note rose 92 basis points from March 31, 2022 to July 31, 2022,” according to BlackRock research.
ESGB’s status as an actively managed fund is relevant for several reasons. First, an active bond can better deal with duration issues/interest rate risk. Second, active managers can more swiftly seek out income opportunities. Finally, active management as it pertains to ESG bond funds is highly pertinent due to a dearth of bonds that credibly meet ESG criteria.
Another reason to consider ESGB is history. While the fund itself is just 15 months old, the precedent of bonds rebounding following weak stretches is something to consider and perhaps indicative of ESGB offering investors “buy low” potential today.
“Bonds have historically provided investors a counterbalance to stocks, especially in down years. History also suggests bond performance has tended to be good following periods of weakness in bond prices -which move in opposite direction as bond yields. The average three-year annualized returns of bonds following a three-year period in which they lost money is 11.6%,” concluded BlackRock.
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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.