Taking On More Risk for Yield Isn’t Necessarily the Best Move

Higher bond prices are conversely pushing down yields to fresh lows for Treasury notes, causing investors to seek yield in higher, riskier debt issues. However, this may not always be the ideal move given the challenging, yield-starved bond market.

As global growth fears persist, bonds will likely continue to be the default safe haven as they have been for years when market downturns have taken place. However, when investors allocate capital into bonds, they shouldn’t expect to see extraordinary returns as a byproduct.

Per a Fortune report, “Global interest rates, already low for most of the decade since the Great Recession, are falling again, making it harder for pension funds and small investors to harvest the slow-and-steady interest income that makes bonds the foundation of many retirement funds. There are a number of factors at play: A decade-long economic expansion is starting to lose its momentum. The U.S.-China trade war threatens to weigh down global commerce. And a majority of economists expect a recession by 2021. “

“Going forward, the returns are going to be lower than they have been in the last decade,” said Scott Mather, a managing director at bond-investing giant Pimco, which has $1.8 trillion in assets under management. “And that makes it challenging for investors.”

What’s The Ideal Maneuver

While the default move is to simply move capital into higher-yielding debt albeit taking on more risk, this is not always the ideal maneuver.

“The natural inclination people have when they see lower yields in their portfolio is to think, ‘Maybe I should allocate more to high yield,’ ” Mather said. “That’s the wrong decision because it can be more dangerous.”

One way to counteract more risk for more yield is to look at higher-quality debt. Here are some ETFs that focus on investment-grade debt.

Related: Treasury Secretary: 50-Year Bond Under Serious Consideration 

Investors looking to gain broad-based exposure to bonds can look at funds like the ProShares S&P 500 Bond ETF (NYSEArca: SPXB). The fund seeks investment results that track the performance of the S&P 500®/MarketAxess Investment Grade Corporate Bond Index, which consists exclusively of investment-grade bonds issued by companies in the S&P 500.

Investment-grade corporate bond-focused fixed-income ETF options include the iShares Intermediate Credit Bond ETF (NASDAQ: CIU)iShares iBoxx $ Investment 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).

For more market trends, visit ETF Trends and to access up-to-date data on ETFs, visit ETFdb.com.