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Bond ETFs Rise as Investors Cut Down on Risk

Bond exchange traded funds gained on Thursday as investors dumped riskier assets in favor of safer fixed income assets.

U.S. equities retreated on Thursday with technology stocks dragging on the markets as investors continued to focus on the Federal Reserve’s interest rate hike outlook, which has been a major cause for concerns about the growth style.

When yields on longer-term bonds move higher, “you tend to reprice those growth stocks,” Tom Hainlin, national investment strategist at U.S. Bank Wealth Management, told the Wall Street Journal. “If you increase that interest rate, that puts pressure on your present value of those companies.”

Sameer Samana, senior global market strategist at Wells Fargo Investment Institute, argued that investors went ahead and took their profits in Nasdaq stocks, Reuters reports.

“We had a pretty nice rebound in the Nasdaq the last few days, so there might just be some lingering nervousness around rates the Fed and some profit taking, especially ahead of earnings,” Samana told Reuters.

Investors have been monitoring the Fed’s outlook on tightening its monetary policy to combat elevated inflationary pressures. Federal Reserve governor Lael Brainard told Congress on Thursday that handling inflation is the central bank’s “most important task.”

The Fed’s rate-setting committee “has projected several hikes over the course of the year,” Brainard told Congress. “We will be in a position to do that as soon as asset purchases are terminated. And we will simply have to see what the data requires over the course of the year.”

“The main story is the market view on the central bank’s next steps. The market is balancing two things: less support from monetary policy, but overall the underlying economy is good, and we think the earnings figures that will start to come out now will be quite strong,” Luc Filip, head of investments at SYZ Private Banking, told the WSJ.

Investors looking to strengthen their fixed income portfolios can consider the Avantis Core Fixed Income ETF (AVIG), which invests in a broad set of debt obligations across sectors, maturities, and issuers. AVIG pursues the benefits associated with indexing, such as diversification and transparency of exposures. However, the fund also has the ability to add value by making investment decisions using information embedded in current yields.

The Avantis Short-Term Fixed Income ETF (AVSF) also invests primarily in investment-grade quality debt obligations from a diverse group of U.S. and non-U.S. issuers with shorter maturities.

The actively managed American Century Diversified Corporate Bond ETF (NYSEArca: KORP) invests in U.S. dollar-denominated corporate debt securities issued by U.S. and foreign entities, but may also hold securities issued by supranational entities. Up to 35% of the fund’s net assets may be invested in high-yield securities or junk bonds. The fund may also invest in derivative instruments such as futures contracts and swap agreements. The weighted average duration of the fund’s portfolio is expected to be between three and seven years.

Additionally, the actively managed American Century Multisector Income ETF (MUSI) is designed for investors pursuing consistent income in a tax-efficient ETF vehicle. The team targets attractive yield throughout the market cycle while offering investors access to a diverse opportunity set of securities, including investment-grade corporates, high-yield corporates, emerging market debt, and securitized bonds.

For more news, information, and strategy, visit the Core Strategies Channel.

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