As you’re allocating your investments for 2023, it may be worthwhile to consider bond ETFs.
"Bond ETFs hold bonds within an exchange-traded fund wrapper, which trades like a stock," says Roxanna Islam, associate director of research with VettiFi. "Compared to direct investment in bonds, bond ETFs are more liquid, transparent, and provide more frequent income."
In addition, Islam says many investors are more comfortable with equity investments over fixed-income investments due to simplicity and familiarity.
"So putting bonds in an ETF wrapper allows fixed income investments to be more accessible to investors who are reluctant to buy bonds directly," Islam tells FOX Business.
WHY YOUR 401(K) MIGHT NOT HAVE ETFS
Bryan Armour, Morningstar's director of passive strategies research for North America, says bond funds – regardless of mutual fund or ETF – are a great way to diversify bond exposure to reduce risks inherent to any one issuer (or a set of issuers).
"Investors can lean on professional management of funds, regardless of whether it's active or passive," Armour tells FOX Business. "The alternative would be investors running their own strategy by purchasing bonds and reinvesting each time they came due. This approach carries little benefit for the investor given the extremely low fees of passive, broadly diversified bond funds."
ARE ETFS A HEDGE FOR INFLATION?
Armour with Morningstar provided information regarding bond ETFs
Vanguard Total Bond Market Index Fund – Armour says this ETF's broad scope (it holds over 10,000 investment-grade bonds) and its low fee (0.03%) should help this fund outperform peers over the long run.
"Roughly half of its portfolio is allocated to government bonds, with corporate bonds and securitized debt filling out the other half," he says. "This fund puts a lid on credit risk exposure but still gets a yield boost compared to a similar duration Treasury ETF. We give it a Morningstar analyst rating of gold."
Fidelity Total Bond ETF– Armour says this ETF is a good reminder that ETFs aren't synonymous with passive investing. This actively managed ETF leverages deep experience, solid resources and thoughtful execution at a low cost (0.36%) to earn its stripes, he says.
"Its sector allocation can change depending on where it sees the best opportunities, but the portfolio generally holds about 35-40% each of government and corporate bonds and 20% securitized debt. It doesn't shy away from high-yield issuers, which make up about 14% of holdings. This provides a yield boost over similar investment-grade-only ETFs. We give it a Morningstar analyst rating of gold," Armour says.
Vanguard Total International Bond Index Fund – According to Armour, BNDX takes abroad the same strategy as BND, resulting in a similarly cheap, diversified portfolio.
"It includes investment-grade bonds issued in currencies other than the U.S. dollar, then uses forward contracts to hedge its currency risk," explains Armour. "Currency hedging gives cleaner exposure to local bond returns and reduces the impact of currency fluctuations. Its sensible, low-cost approach earned it a Morningstar analyst rating of silver."
