Investors no longer view fixed income as the safe harbor asset it was once perceived as. Funds tracking the U.S. bond market have lost roughly 16% year-to-date, while long-dated U.S. Treasurys have plummeted 34%.
However, some experts argue that long-term investors still have some good opportunities in the fixed income space. Mike Mulach, a senior manager research analyst at Morningstar, told the Wall Street Journal that with yields having risen “so ruthlessly,” now may be the right time to lock in higher rates previously unavailable.
“This is a tremendous opportunity,” Mulach added.
One such opportunity is in intermediate-maturity bond funds, which provide broad market exposure and are popular with investors who may have less capital to allocate. While these funds have been slammed for owning many rate-sensitive bonds and have no final maturity, performance is expected to improve.
Frost Investment Advisors’ director of fixed income Jeffery Elswick, who told the Journal that “it’s beginning to look somewhat compelling” to have a meaningful allocation to core U.S. fixed income, believes that once the Federal Reserve pivots to cutting interest rates, many intermediate bonds currently facing principal losses will rebound.
Typically, intermediate funds hold maturities of four to 10 years. So, experts recommend holding such strategies for several years at least.
When choosing a fixed income fund, investors should match a fund’s duration with their own investment time horizon. Rick Lear, a portfolio manager in Dallas, advised considering funds from a total-return perspective and contemplating the potential impact on performance.
Among intermediate funds highly rated by Morningstar is the Vanguard Intermediate-Term Bond ETF (BIV). BIV offers exposure to investment grade U.S. debt with maturities between five and ten years, putting it in between short-term funds such as BSV and longer-dated products such as BLV. The fund’s holdings include Treasuries, corporate debt, and agency securities, avoiding high risk junk bonds or floating-rate debt.
“BIV gets high marks for its cost efficiency (including a low expense ratio and commission-free trading in Vanguard accounts) and impressive depth of exposure made possible in part by Vanguard’s unique patent and fund structure,” according to FactSet’s analyst report.
While currently down more than 17% year-to-date, BLV yields 4.9%. It also carries an expense ratio of 0.04%.
For more news, information, and strategy, visit the Fixed Income Channel.