This week, the VettaFi Voices come together for an abbreviated chat about an important topic: the debt ceiling. How should investors be looking at the looming, near-term externality of a default? What kind of investments stand out in such an environment? What can be done from an investing perspective to deal with the debt ceiling?
Todd Rosenbluth, head of ETF research: We have seen strong engagement in investment grade corporate bond ETFs. Advisors want high-quality, stable income and can get the benefits of diversification. I wrote a chart of the week on this recently focused on not just broad ETFs like the Vanguard Intermediate-Term Corporate Bond ETF (VCIT) and the iShares iBoxx $ Investment Grade Corporate Bond ETF (LQD), but also smart-beta and active ETFs. Others include the Goldman Sachs Access Investment Grade Corporate Bond ETF (GIGB) and the iShares North American Natural Resources ETF (IGE). Those benefit from a higher-quality, fundamental focus.
I also think dividend strategies might become popular as corporate profits have been stronger than expected, and the income is stable. Of course, there are dividend growth ETFs, too. Investors can consider something like the ProShares S&P 500 Dividend Aristocrats ETF (NOBL). They also can consider funds such as the Vanguard Dividend Appreciation ETF (VIG) and the WisdomTree US Quality Dividend Growth Fund (DGRW). They have more of a focus on companies with strong fundamentals that have raised or plan to raise dividends.
I should add, too, that there are high dividend yield ETFs. Investors can consider the Vanguard High Dividend Yield Index ETF (VYM) and the iShares Core High Dividend ETF (HDV). Like HDV, the ALPS Sector Dividend Dogs ETF (SDOG) offers higher yields.
Advisors likely have more confidence in blue-chip companies meeting debt obligations or paying dividends than in the US government—as scary as that is.
Dave Nadig, financial futurist: When we asked advisors about this earlier in the week, we got a pretty interesting response. More than half of advisors are making no changes to their portfolios whatsoever. Of the remainder, about two-thirds were extending duration at least past the window of uncertainty. The remaining third were actually buying shorter duration bonds advertising higher yields. But overall, panelists came together unanimously on the idea that all this bond activity is just a “parking place” position.
The impacts on other asset classes might be even more severe than in short-term Treasuries. That puts advisors in a real pickle about where to be seeing returns in this window. The funniest question we got from the audience was simply, “Why not just buy CDs?”
It’s really that dramatic right now: Folks just don’t know where to hide from political winds.
Longer term, I think most of the world assumes we’ll get past this. Nobody thinks the U.S. is turning into Nicaragua or Ecuador in 2008…
It appears to be just a matter of positioning past it and then deciding your risk asset exposure. To Todd’s point, defensive equity continues to seem like a winner (but wait for the growth story to come roaring back post Nvidia’s earnings).
Rosenbluth: Wow, why not buy CDs? That’s a sign investors don’t know what to expect. Since this is more of an ETF discussion, I would note that ultra-short active ETFs can provide a good option. ETFs like the JPMorgan Ultra-Short Income ETF (JPST) or the Vanguard Ultra-Short Bond ETF (VUSB) appeal thanks to their teams. They look for opportunities with the flexibility to invest in non-government bonds. The yields are quite compelling.
One final comment from me: Leaving politics aside, this is a reminder that there is risk involved in all aspects of investing. While we tend to view US Treasuries as being as low-risk as one can get, at least short-term Treasury ETFs like the SPDR Bloomberg 1-3 Month T-Bill ETF (BIL), the US Treasury 3 Month Bill ETF (TBIL) and the BondBloxx Bloomberg Six Month Target Duration US Treasury ETF (XHLF), with any investment in the bond market, there is a greater-than-zero chance that any issuer can default. Investments are not guarantees. If you want to ensure safety, don’t invest.
Tom Lydon, VettaFi vice chairman: Advisors have had to deal with debt ceiling negotiations and deadlines before. More advisors feel that for the government to successfully come up with an agreement in time, they must push their issues hard until the deadline. Then both sides give concessions at the eleventh hour.
Like most Americans, financial advisors see more risk for government officials to not agree on a deal in time. However, it’s not worth shaking up confidence in the US government, disrupting government employee pay, and threats to the stock market. On the positive side, if the agreement comes before the deadline, the markets should respond favorably.
For more debt ceiling investing news, information, and analysis, visit the Fixed Income Channel.
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