Bond exposure isn’t simply for shielding a downturn as investors saw when the coronavirus-fueled sell-off sparked a flight to bonds. Over the long term, bonds have the ability to outperform equities as noted in a New York Times article.
“Over the last 20 years—which counts as a very long time for me—investments in important kinds of bonds have outperformed the stock market. That includes long-term Treasuries, long-term corporate bonds, and high-yield (or junk) bonds. It is true even after the startling rally in the stock market since March 23,” wrote The New York Times’ Jeff Sommer. “But the remarkable performance of bonds—and of bond funds—isn’t cause for celebration, and it’s not a recipe for building wealth in the future.”
With a lot of uncertainty in today’s market, even safe haven assets like bonds could be subject to the pangs of a market downturn. As such, getting the right amount of exposure is necessary.
“To the contrary, the reversal of the customary bond-stock performance is deeply troubling” Sommer added. “It is a sign of how unreliable many assumptions about financial markets actually are these days — of how risky the markets have become and of how difficult it is to invest sensibly for the future.”
“The performance numbers are startling,” Sommer wrote. “To calculate them, I used a series of Bloomberg indexes, which I compared with the total return of the S&P 500, including reinvested dividends, from the beginning of 2000 through April 29. These results are reflected in mutual funds and exchange-traded funds that hold broad arrays of bonds.”
Here are what the calculations yielded in terms of returns for the S&P 500 and various types of bonds:
- The S&P 500: 5.4%
- Treasury bonds with a duration of at least 10 years: 8.3%
- Long-term investment-grade corporate bonds: 7.7%
- High yield bonds: 6.5%
- Broad investment-grade bond index (Bloomberg Barclays US Aggregate Bond index): 5.2%
With the Federal Reserve stepping in to purchase corporate bonds to help keep the economy afloat, one ETF to consider is the Goldman Sachs Access Investment Grade Corporate Bond ETF (GIGB). GIGB seeks to provide investment results that closely correspond to the performance of the FTSE Goldman Sachs Investment Grade Corporate Bond Index.
The fund seeks to achieve its investment objective by investing at least 80% of its assets (exclusive of collateral held from securities lending) in securities included in its underlying index. The index is a rules-based index that is designed to measure the performance of investment grade, corporate bonds denominated in U.S. dollars that meet certain liquidity and fundamental screening criteria.
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