Bonds have been following the downward selling pressure of stocks amid rising interest rates and inflation for the majority of 2022. However, the stage is set for a comeback in 2023 for bond-focused exchange traded funds (ETFs).
The bond market can only go up from here after a tumultuous year that’s not been seen in quite some time.
“As each of these headwinds has played out, bond markets have experienced their worst annual performance since the inception of Morningstar’s fixed-income indexes,” a Morningstar report noted. “In fact, looking at other indexes dating back to 1976, this year was the worst performance for fixed income ever.”
The capital markets are optimistic that the Fed will eventually scale back its monetary policy tightening heading into the new year. That should once again fuel a taste for bonds as interest rates drop, reversing the course for bond prices.
“As we head into 2023, we expect that the Fed is nearing the end of its tightening cycle and that the preponderance of interest-rate increases in the long end of the curve are behind us,” Morningstar added.
4 Funds Worthy of Consideration
One way to deal with any potential bond market volatility is to use an active management strategy that essentially puts the bond holdings in the hands of market professionals. In the vast universe of bonds where the market can be complicated and esoteric, active management takes out all the guesswork for an individual investor or financial advisor.
Invesco has four active funds worth considering for various corners of the bond market in the case of a bond comeback:
- The Invesco AAA CLO Floating Rate Note ETF (ICLO) seeks current income and capital preservation and invests in floating-rate note securities issued by collateralized loan obligations (CLOs) that are rated AAA or equivalent by nationally recognized statistical rating organizations (NRSROs).
- The Invesco High Yield Select ETF (HIYS) seeks current income and will invest in higher-quality below investment-grade fixed income securities, such as corporate bonds and convertible securities. The fund considers such higher-quality securities as those rated between B- and BB+ (or equivalent) by NRSROs.
- The Invesco Municipal Strategic Income ETF (IMSI) seeks current income exempt from federal income tax by investing in municipal securities exempt from federal income taxes and in other instruments that have similar economic characteristics. The fund will normally maintain a weighted average portfolio duration of less than 7.5 years.
- The Invesco Short Duration Bond ETF (ISDB) seeks total return, comprised of income and capital appreciation. The fund invests in fixed income securities, including high yield bonds, and other instruments that have similar economic characteristics. ISDB aims to maintain a portfolio maturity and duration between one and three years.
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