Yields Might Be Low, But Don’t Forget About Bonds

Getting core bond exposure is still a must in today’s market despite the low yields. One thing investors must take note of is inflation—what goes up must come down and vice versa—and that’s why bonds are necessary.

One has to take a DeLorean time machine and go back to the late 70s and early 80s as a case-in-point scenario.

“Most bond investors recognize why it’s important to focus on interest rates on an after-inflation basis, though many do so only when reminded,” a MarketWatch report noted. “For example, when contemplating a historical chart of the one-year Treasury rate, most of my clients drool when noticing that in the late 1970s and early 1980s this rate rose to more than 15% — more than 100 times the current level.

“Yet they forget that inflation also was in double-digits at that time,” the report noted. “In real (after-inflation) rather than nominal terms, the one-year Treasury rate in that earlier era was actually lower than it is today. To overlook inflation is to be guilty of what economists call “money illusion” (or inflation illusion).”

ETF investors looking for core bond exposure can look to the iShares Core U.S. Aggregate Bond ETF (NYSEArca: AGG), which has been the go-to fund for investors.

Fund facts:

  • AGG seeks to track the investment results of the Bloomberg Barclays U.S. Aggregate Bond Index.
  • The index measures the performance of the total U.S. investment-grade bond market.
  • The fund generally invests at least 90% of its net assets in component securities of its underlying index and in investments that have economic characteristics that are substantially identical to the economic characteristics of the component securities of its underlying index.

Reasons to use AGG:

  • Broad exposure to U.S. investment-grade bonds
  • A low-cost easy way to diversify a portfolio using fixed income
  •  Use at the core of your portfolio to seek stability and pursue income

AGG Chart

AGG data by YCharts

An Additional Corporate Bond Alternative

Another 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.

For more market trends, visit ETF Trends.