Higher interest rates could lead to bond investments generating compelling returns for the coming years.
In a higher rate environment, long-term bond investors can benefit from higher reinvestment rates and generated income, according to Harbor Capital Advisors. Since most bond returns come from the interest, income generated typically more than offsets negative price return from rising rates.
Historically, the period following a Fed tightening cycle has been favorable for bond investors. According to Harbor, after the last three Fed rate hiking cycles (2000, 2006, and 2018), rates were cut on average 1.75% over the following 12 months and 3.42% over 24 months. In those 12- and 24-month periods, high yield investments were an option for investors.
While fixed income investments have historically offered attractive returns after a tightening cycle, U.S. equities have underperformed during these periods.
Many investors are underexposed to bonds, as they have not provided substantial value to portfolios in years past. However, with the Fed currently expected to be near the end of its tightening cycle, now may be an opportune time for investors to consider an allocation to bonds.
Investments in High Yield Bond ETFs
The Harbor Scientific Alpha High-Yield ETF (SIHY) is an active ETF offering distinct exposure to the high yield bond market. The Fund seeks to provide total returns by employing a structured investment process that uses a proprietary model-based framework in the security selection of high yield bonds.
SIHY is sub-advised by scientific asset management firm BlueCove. BlueCove was founded with the intent of delivering strong fixed income investment outcomes for investors. The firm achieves this by researching and developing an innovative scientific investment processes.
Harbor believes SIHY is a cost-efficient solution for investors looking for high-quality active management. The high yield strategy notably charges one basis point less than its largest high yield bond ETF Morningstar category peer.
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Important Information
Investors should carefully consider the investment objectives, risks, charges, and expenses of a Harbor fund before investing. To obtain a summary prospectus or prospectus for this and other information, visit harborcapital.com or call 800-422-1050. Read it carefully before investing. For the most current performance, holdings and fees, please click: SIHY
Unlike mutual funds, ETFs may trade at a premium or discount to their net asset value. The ETFs are new and have limited operating history to judge.
SIHY Risks: All investments involve risk including the possible loss of principal. Fixed income securities fluctuate in price in response to various factors, including changes in interest rates, changes in market conditions, and issuer-specific events, and the value of your investment in the Fund may go down. There is a greater risk that the Funds will lose money because they invest in below-investment grade fixed income securities and unrated securities of similar credit quality (commonly referred to as “high-yield securities” or “junk bonds”). These securities are considered speculative because they have a higher risk of issuer default, are subject to greater price volatility, and may be illiquid.
Because the Funds may invest in securities of foreign issuers, an investment in the Funds is subject to special risks in addition to those of U.S. securities. These risks include heightened political and economic risks, greater volatility, currency fluctuations, higher transaction costs, delayed settlement, possible foreign controls on investment, possible sanctions by government bodies of other countries, and less stringent investor protection and disclosure standards of foreign markets.
Additional Information
The views expressed herein may not be reflective of current opinions, are subject to change without prior notice. They should not be considered investment advice or purchase a particular security.
BlueCove Limited is a third-party subadvisor to the Harbor Scientific Alpha High-Yield ETF.
This article was prepared as Harbor Funds paid sponsorship with VettaFI.
Foreside Fund Services, LLC is the Distributor of the Harbor ETFs.
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