With aggregate bond benchmarks sporting deep double-digit year-to-date losses thanks to the Federal Reserve’s interest rate-hiking regime, it’s not surprising that many advisors and investors are pondering the need to allocate to fixed income.
That’s a relevant near-term concern, but on the other hand, it’s risky to ignore an asset class in wholesale fashion. Plus, some corners of the bond market beckon with value, indicating exchange traded funds such as the SPDR Bloomberg SASB Corporate Bond ESG Select ETF (RBND) could be worth considering.
RBND is one of a newer breed of ETFs that marry bonds and environmental, social, and governance (ESG) benefits. That could be an appealing combination at a time when investors are looking to reduce portfolio risk.
“Bonds are inherently less risky because their owners get more of their cash flows up front and have more certainty about receiving a given value at maturity,” notes Morningstar analyst Amy Arnott. “Their value primarily hinges on two things: the issuer’s underlying credit quality and changes in market interest rates. As residual assets, stocks have much more upside potential, but they are guaranteed to be riskier. Their value is less straightforward, too, since it ultimately depends on the present value of cash flows that must be modeled many years into the future.”
RBND has an option-adjusted duration of 6.85 years, putting it intermediate-term territory – the duration category which often sports the lowest correlation to equities. That could signal that RBND offers diversification benefits along with income and ESG perks. It’s also relevant at a time when investors are vexed by bonds and stocks faltering in unison.
“Bonds can also provide diversification benefits thanks to their generally low correlations with stocks. Even during periods of rising interest rates, bonds usually have a lower correlation with stocks than most other major asset classes, which enhances their ability to reduce risk at the portfolio level. Our analysis of previous stress periods for inflation and interest rates indicates that stock/bond correlations have rarely increased above 0.6,” adds Arnott.
Speaking of income, RBND shines on that front as it sports a 30-day SEC yield of 5.52%. Considering that the higher a bond’s yield is when an investor buys it, the better long-term outcomes can potentially be, RBND merits consideration. RBND offers these benefits with minimal credit risk as roughly half of its 460 holdings reside somewhere in “A” territory.
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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.