What To Do About Your Fixed Income Portfolio

Fixed income—and what to do about it—was one of the big themes at Inside ETFs Tuesday. With everyone preaching the official end of the 30-year bond rally, where to allocate in fixed income is a burning question in many investors’ minds.

The good news is that according to a panel of experts including BlackRock’s Matt Tucker, ProShares’ Simeon Hyman, Nuveen’s Martin Kremenstein, Vanguard’s Greg Davis and IndexIQ’s Salvatore Bruno, owning the universe of the Bloomberg Barclays Aggregate still makes sense. But it also makes sense to tweak—as in pick and choose—that exposure to tilt away from Treasurys, which dominate the Agg, and weight more heavily toward investment-grade corporates in 2017.

Yes, there’s always a place for Treasurys in a portfolio. In an equity market downturn, Treasurys make sense, and it would be riskier to go zero Treasury and zero duration in the case of a downturn. It’s important to think about fixed income in the long term.

Extra Yield

But this year, corporates are still offering value, even though spreads are beginning to deteriorate. And the yield premium you get for the amount of duration exposure is more attractive than Treasurys at the moment, they said. You would be essentially picking up extra yield for the same amount of duration risk in an investment-grade security.

Beyond that, the panel also debunked an old market adage: Own your age in bonds. That no longer applies in today’s market or with today’s demographic trends.

“We live too long at this point,” Hyman said.

As you get older, your biggest enemy is inflation, and if you live to 90, you won’t be able to keep up with that 90% bond allocation. As you age, you still need capital appreciation, and longevity is turning that old belief of owning your age in bonds on its head.

Unfortunately today, the right amount of fixed-income exposure and the right mix depends on the individual, on what other sources of income they might have, other assets, etc. There’s no longer a one- size-fits-all allocation idea when it comes to fixed income.

For 2017, the panel offered its favorite investing ideas in this segment. Beyond the relative appeal of investment-grade corporates, they offered the following:

• Tucker likes shorter-term high-yield bonds—ETFs such as the iShares 0-5 Year High Yield Corporate Bond ETF (SHYG). Returns now are more about income and yield than price appreciation, he says, so the question investors face is how they’ll earn income. This pocket of the market could help with that.
• Kremenstein’s advice is broader: “Filter out noise” and position yourself for a rising rate environment.
• Hyman also likes shorter-term high yield, and his pick is the ProShares High Yield-Interest Rate Hedged ETF (HYHG) because can take duration to zero with that fund.
• Davis likes a strong core bond allocation via a classic ETF such as the Vanguard Total Bond Market Index Fund (BND). It’s all about the long-term view.
• Bruno likes the idea of high yield with a low-vol angle. His pick is a fund coming to market next month, the IQ U.S. High Yield Low Volatility ETF (HYLV).

The biggest black swan threat they see to these ideas? You probably guessed it: Twitter.

Contact Cinthia Murphy at [email protected]