This article is part of a regular series of thought leadership pieces from some of the more influential ETF strategists in the money management industry. Today's article features Steve Blumenthal, chairman and chief executive officer of King of Prussia (greater Philadelphia area), Pennsylvania-based CMG Capital Management.
Advisors manage portfolios to achieve a desired result within a specific time frame. Equity exposure over a market cycle remains an important part of the portfolio equation. Real life tells us that, for many investors, waiting out a full market cycle becomes more challenging as retirement nears.
BlackRock estimates that nearly 75 percent of investable assets in the U.S. will be in the hands of preretirees and retirees by 2020. Needs shift in retirement from growth to income. That's a lot of money that lacks the time needed to overcome a significant equity market decline.
That's a tall order for the retiree with fixed-income yields at just 2.22 percent—today's [Sept. 10, 2015] 10-year Treasury yield. Portfolios need to provide income and outpace inflation.
Overcoming The Challenge
But here's a fixed-income strategy that you may consider implementing to navigate the risks imbedded in the current low-interest-rate environment.
Some experts believe rates will be lower for longer. Such a view favors long-term government bond exposure. Others see higher rates in the years ahead. Their view is that rising defaults in emerging market debt, high-yield debt and sovereign bonds from Europe to Japan are raising the risk level for fixed income across the globe.
Collectively the developed countries owe too much. Some form of default is a risk we investors must consider. Investors will demand higher rates. Deflation and higher rates? It might happen ... I'm not sure.
Direction confusion remains. Twenty-five Wall Street economists felt interest rates would rise in 2014 to an average of 3.25 percent. None saw the yield finishing the year under 3 percent. They were all wrong and missed the fourth-best-performing year in the history of the U.S. bond market. The 10-year Treasury finished 2014 at 2.20 percent.
Pick Your Favorite Strategist And Position Accordingly?
I have my own expert view (put me in the "rates will be lower for longer" camp), but with rates so low and risk so high, frankly, I'm not so sure I'm comfortable investing in long-term bond ETFs. I, too, believed rates would rise in 2014.
However, I favor an approach that combines fundamentals and price trend to help me stay in line with interest-rate trends. In other words, despite my personal view that rates would rise last year, this process properly signaled to stay invested in longer-dated bond ETFs.