Seek to capture today’s yields with bond ETFs

BONDS / FIXED INCOME

Apr 25, 2024

Karen Veraa, CFA

Key takeaways

Yields are higher today than they were 20 years ago. If inflation indicators continue to fall, the time of elevated cash rates may be drawing to a close.
Investors are choosing ETFs in record numbers, with 2023 global bond ETF inflows at $333 billion.¹
But investors are still significantly underweight to fixed income, with a 19% average allocation, based on total U.S. industry assets under management.²
We believe investors may still want to consider moving back into fixed income because, historically, the market has tended to price in rate actions before they occur.
ETFs can be a powerful tool for investors as they recalibrate their fixed income allocations.

Seek to capture higher rates

Despite an uneven descent in inflation,³ the Fed may still be nearing the end of a tightening cycle that made cash savings rates attractive. This means your clients may benefit from moving back into fixed income to capture current yields, a particularly compelling message for clients who may be overweight cash.

Instead of trying to time the markets (which is near impossible), investors may consider beginning to move ahead of announced changes in Fed policy rates, incrementally stepping out of cash, and increasing fixed income exposure by getting back into bonds. History shows that when the U.S. central bank pivots from a hiking cycle to an easing one, bond markets have tended to do well in the pause period, as Figure 1 illustrates.

Figure 1: Bonds have historically delivered the strongest performance during the ‘hold’ period
Average annualized returns (%), 1990 - 2024

Source: Bloomberg as of March 31, 2024. Historical analysis calculates average performance of the Bloomberg U.S. Aggregate Bond Index (bonds) and the Bloomberg U.S. Treasury Bills: 1-3 Months TR Index (cash) over different time periods. The dates used for the last rate hike of a cycle are: Feb. 1, 1995, March 25, 1997, May 16, 2000, June 29, 2006, Dec. 19, 2018. Dates used for the first-rate cut are: July 7, 1995, Sept. 29, 1998, Jan. 3, 2001, Sept. 18, 2007, Aug. 1, 2019. Index performance is for illustrative purposes only. Index performance does not reflect any management fees, transaction costs or expenses. Indexes are unmanaged and one cannot invest directly in an index. Past performance does not guarantee future results.

Get your clients off the sidelines

The volatile markets of the past few years may have caused investors to, understandably, move money into a less volatile asset – cash.

While cash has provided income temporarily during the Fed’s recent tightening cycle, over the long-term in normal, upward-sloping yield curve environments, longer-dated instruments can provide more income to a portfolio.⁴

Many investors are still significantly underweight to fixed income, with a 19% average fixed income allocation, based on total U.S. industry assets under management.⁵ The allocation has fallen far below the “60/40” portfolio allocation often referenced in balanced portfolio discussions. Although the 60/40 allocation itself may not be right for every client, we believe investors on average should hold more fixed income than they currently do depending on factors like their goals and their tolerance for risk.

Harnessing the power of bond etfs

We believe bond ETFs will be a tool of choice for advisors as they recalibrate clients’ fixed income allocations and implement whole portfolio solutions using index and active strategies. With over 2,300 bond ETFs globally, investors today have more choices and tools than ever.⁶ The breadth of the fixed income ETF toolkit provides the flexibility to suit almost any client’s income or return objective and risk profile.

In 2023, global bond ETF inflows rose 25%, hitting a record $333 billion.⁷ We believe this market will grow to $6 trillion in assets under management by 2030 as more investors view ETFs as a powerful way to access the bond market.

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