The 40% allocation into bonds has proven to be a challenge given that Treasury note yields have gone to basement-low levels. With more investors adding bonds to their portfolios, it’s skyrocketed bond prices and driven yields down to a point where negative rates are entering fixed income vernacular–does this mean the 60-40 strategy is dying off?
“But the finance industry is rethinking this advice, with some advisors calling the 60-40 split dead, and encouraging investors to consider riskier alternatives,” wrote Allison Schrager in Quartz.com “The first shot fired was a report from Bank of America’s Jared Woodard and Derek Harris, who argued bonds no longer offer diversification, and over the longer term, bonds will be subject to more volatility. The 60-40 split, they argue, made sense in a world where stocks and bonds were negatively correlated. Because bond returns rose when stock prices fell, bonds served as a hedge against falling stock prices, and stock were a hedge against inflation.”
Per Schrager’s article, Bank of America experts “suggest seeking more diversification in other assets, instead, recommending high-dividend stocks and riskier bonds, such as municipal debt and short-term, high yield (aka junk) bonds. JP Morgan is making a similar recommendations. The bank suggests other income generating assets, like real estate.”
Here are three municipal bond ETFs to consider:
- VanEck Vectors AMT-Free Long Municipal Index ETF (BATS: MLN): seeks to replicate as closely as possible, before fees and expenses, the price and yield performance of the Bloomberg Barclays AMT-Free Long Continuous Municipal Index. The index is comprised of publicly traded municipal bonds that cover the U.S. dollar-denominated long-term tax-exempt bond market.
- Xtrackers Municipal Infrastructure Revenue Bond ETF (NYSEArca: RVNU): seeks investment results that correspond generally to the performance, before fees and expenses, of the Solactive Municipal Infrastructure Revenue Bond Index. The fund will invest at least 80% of its total assets (but typically far more) in instruments that comprise the underlying index. The underlying index is comprised of tax-exempt municipal securities issued by states, cities, counties, districts, their respective agencies, and other tax-exempt issuers.
- Franklin Liberty Municipal Bond ETF (NYSEArca: FLMB): seeks a high level of current income that is exempt from federal income taxes. Although the fund tries to invest all of its assets in tax-free securities, it is possible that up to 20% of the fund’s net assets may be in securities that pay interest that may be subject to the federal alternative minimum tax and, although not anticipated, in securities that pay interest subject to other federal or state income taxes.