It’s easy to overlook bonds as opposed to equities given their more static returns in nature as opposed to the more dynamic stocks that can move and shake when markets are roaring, as well as vice versa. While bonds may not be ideal for the adrenalin-fueled investor, they can still gain that much-needed fixed income exposure via exchange-traded funds.
Janet Brown, a finance contributor at Forbes, cited three common misconceptions investors have when it comes to core fixed income exposure—bonds are a high risk proposition when rates rise, they don’t generate enough returns and they’re only ideal for retirees.
To the first myth, Brown cited that investment firm Vanguard actually found that in the long run, bonds were beneficial in a portfolio.
“Vanguard found that bonds would lose around 13% in the first year, which is a substantial loss for bonds,” wrote Brown. “But because the yield on bonds would now be higher, the expected return going forward would be around 5.1% annually, meaning the breakeven point would be just over three years. So even in this worst-case scenario, bonds held for several years still made money.”
As far as bonds not making money, one can only look to the Bloomberg Barclays Aggregate Bond Index, which has been up every calendar year dating back to 1976. Furthermore, it experiences losses in only three of the last 42 years.
Lastly, bonds are ideal for every investor—retired or not. Fixed income provides a buffer against stock market volatility by being a safe haven asset, particularly when market drawdowns occur.
“I believe there are better ways to produce cash for steady income than taking monthly or quarterly distributions in cash,” wrote Brown. “But including a ballast against the volatility of the stock market is smart for most investors, and bonds are probably the best asset class to accomplish this.”
For investors looking to add core exposure to bonds, an exchange-traded fund (ETF) can be ideal if they’re still hesitant about deep-diving into bonds. According to the latest report on ETF flow data from State Street Global Advisors, fixed income ETF inflows were out of this world in the month of June, garnering over $25 billion.
Investment-grade corporate bond-focused fixed-income ETF options include the iShares Intermediate Credit Bond ETF (NASDAQ: CIU), iShares iBoxx $ Invmt Grade Corp Bd ETF (NYSEArca: LQD) and Vanguard Interm-Term Corp Bd ETF (NASDAQ: VCIT). Investors looking for broad-based core bond exposure can look to a fund like the iShares Core US Aggregate Bond ETF (NYSEArca: AGG).