Financial Planner: Use Bonds as a "Shock Absorber" | ETF Trends

Equities investors have been well aware of the recent market moves lately, which re-focuses on the need for bonds in a balanced portfolio as a “shock absorber.”

Last Tuesday marked a third straight day of losses for the market as rising yields have been causing investors to fret as of late. This has to be forcing investors to re-think the use of bonds.

“My outlook on bonds remains that they serve a critical role of shock absorber when stocks tank,” said Allan Roth, a certified financial planner and founder of Wealth Logic in Colorado Springs, Colorado.

Gone are the days when growth-fueled portfolios were able to provide the stellar returns of the past decade’s bull run following the 2008 financial crisis. This caused investors and financial advisors to re-think the traditional 60-40 portfolio and deem it as obsolete in the current market environment.

However, history tells us that when markets head in a downward direction, the more bonds the better.

“An allocation with more than 70% stocks and the rest in bonds and cash took more than two years to recover from the 2008 financial crisis, compared with just seven months for portfolios with more than 70% in bonds and cash and the rest in stocks, according to calculations provided by Charles Schwab,” a CNBC article said.

Two Bond Options to Consider

One place investors can start in order to get aggregate bond exposure is the Vanguard Total Bond Market Index Fund ETF Shares (BND). BND presents bond investors with an all-encompassing, aggregate solution to getting U.S. bond exposure, and presents an ideal solution for investors seeking to complement their equities exposure.

Another option given the rising yields is to shorten duration with safe haven government bonds. This is where the Vanguard Short-Term Treasury ETF (VGSH) is a prime option to consider.

With shorter duration comes decreased interest rate risk, especially when the Federal Reserve begins to start easing its stimulus measures and starts to raise rates. This ETF offers exposure to short-term government bonds, focusing on Treasury bonds that mature in one to three years.

Overall, VGSH:

  • Seeks to provide current income with modest price fluctuation.
  • Invests primarily in high-quality (investment-grade) U.S. Treasury bonds.
  • Maintains a dollar-weighted average maturity of one to three years.

For more news, information, and strategy, visit the Fixed Income Channel.