As we look for ways to best position the market environment ahead, investors should consider the range of exchange traded fund choices available.
In the recent webcast, Bonds as a Ballast: A Renewed Case for the 60/40, Andrew J. Patterson, Senior Economist, Vanguard; and Matthew Sheridan, Investment Consultant, Vanguard, took a look at the current conditions and predicted how the markets could play out ahead. The strategists pointed to improving conditions with U.S. activity continuing a strong pace through the second quarter, and the economy should continue to pick up momentum as immunization efforts increase, which should push more people to engage in normal out-of-house activities and find jobs.
Meanwhile, the Covid-19 accommodative measures have provided strong support for the rebound, bolstering savings that could be eventually translated to more economic activity.
Looking ahead, while the Vanguard strategists see a short-term spike in inflation due to the pent-up demand associated with high savings over the Covid-19 pandemic, inflation rates should begin to normalize toward the mid-term. They expect the Federal Reserve to lift off when the probability of meeting or exceeding their targets (KPIs) exceeds the probability of falling short. The sustained core inflation greater than or equal to 2% is expected to take longer than the labor market recovery.
“We expect conditions to warrant U.S. interest rate liftoff in 2023,” according to Vanguard.
As we think about diversifying our investment portfolios, the Vanguard analysts outlined various case scenarios. For example, over the next decade, they calculated that a traditional market cap 60% stock and 40% bond portfolio could generate a median return of 4.09% with a volatility of 9.2%. In comparison, a more aggressive 80% stock and 20% bond portfolio would generate a 4.79% median return with 12.37% volatility.
Looking at the next 10 years, the Vanguard strategists noted that global equities ex-U.S. are expected to generate the highest returns at a range of 5.5% to 7.5% with 18.9% median volatility. In comparison, U.S. equities will generate a return of about 2.6% to 4.6%, with a median volatility of 16.7%.
Meanwhile, looking at fixed-income assets over the next 10 years, the Vanguard strategists estimated that U.S. high yield corporate bonds could generate the highest returns at 2.2% to 3.2% with a 10.2% median volatility, followed by emerging markets sovereigns at 2.1% to 3.1% with a 9.9% median volatility. In comparison, the U.S> aggregate bonds could see a 1.4% to 2.4% return with a 4.5% median volatility.
To help investors diversify a well-balanced equity and fixed income portfolio, investors can consider bond ETF strategies. Vanguard offers a diversified line of fixed-income ETFs across a range of domestic and international categories, including:
- Vanguard Total Bond Market Index Fund ETF Shares (BND)
- Vanguard Mortgage-Backed Securities Index Fund ETF Shares (VMBS)
- Vanguard Short-Term Bond Index Fund ETF Shares (BSV)
- Vanguard Intermediate-Term Bond Index Fund ETF Shares (BIV)
- Vanguard Short-Term Bond Index Fund ETF Shares (BSV)
- Vanguard Short-Term Treasury ETF (VGSH).
- Vanguard Intermediate-Term Treasury Index Fund ETF Shares (VGIT)
- Vanguard Long-Term Treasury Index Fund ETF Shares (VGLT)
- Vanguard Total Corporate Bond ETF ETF Shares (VTC)
- Vanguard Short-Term Corporate Bond Index Fund ETF Shares (VCSH)
- Vanguard Interim-Term Corporate Bond ETF (VCIT)
- Vanguard Long-Term Corporate Bond Index Fund ETF Shares (VCLT)
- Vanguard Tax-Exempt Bond ETF (VTEB)
- Vanguard Short-Term Inflation-Protected Securities Index Fund ETF Shares (VTIP)
- Vanguard Extended Duration Treasury Index Fund ETF Shares (EDV)
- Vanguard ESG U.S. Corporate Bond ETF (VCEB)
- Vanguard Total International Bond Index Fund ETF Shares (BNDX)
- Vanguard Total World Bond ETF (BNDW)
- Vanguard Emerging Markets Government Bond Index Fund ETF Shares (VWOB)
Financial advisors who are interested in learning more about bond strategies can watch the webcast here on demand.