With the first quarter in the books, bonds are already having a forgettable 2022. But it doesn’t mean investors should shun them altogether. Bonds still have a place in an investor’s portfolio.
Rising interest rates are typically a thorn in the side of bond investors. However, with inflation running hot, it’s also negatively affecting the major stock market indexes.
“Investors may still want to take a fresh look at bonds and consider balancing portfolios of stocks,” Barron’s notes. “As the Federal Reserve embarks on sharply rising short-term interest rates, the greater risk could actually now be in stocks. A push by the Fed to raise rates to as much as 3% by year-end runs the risk of tipping the economy into recession.”
That said, bonds are still a safe haven option when the stock market heads south. A traditional 60% stocks and 40% bonds portfolio split can still serve a purpose despite the strategy being tagged by some as arcane in recent years.
“Bonds can act as good diversifiers in a portfolio,” Barron’s adds. “Hence the long-recommended 60/40 blend of stocks and bonds. The key, however, is rates. Bonds offer poor diversification at rock-bottom yields like those at the start of 2022. But as yields rise, the risk in bonds falls, and their diversification benefits increase.”
An Active Option
One way to assemble a bond portfolio is to simply leave it in the hands of professionals. Active management strategies can offer investors dynamic exposure to the bond markets but leave the handpicking of bonds to the professionals.
This is essentially what the T. Rowe Price Total Return ETF (TOTR) does. TOTR seeks to maximize returns for investors primarily through income and capital appreciation by investing in a diverse set of bonds and debt instruments.
TOTR is constructed to be flexible in changing market conditions while still seeking strong returns. The fund primarily invests in U.S. intermediate-term bonds but has the freedom to purchase bonds from across the global opportunity set and maturity spectrum.
Examples might include debt securities issued by the U.S. government and its agencies, corporate bonds, bank loans, and various types of mortgage-backed and asset-backed securities. TOTR is ideal for the investor looking for a fixed income portfolio that goes beyond static indexes, with the flexibility to underweight or overweight duration in order to actively manage interest rate risks and other market dynamics.
For more news, information, and strategy, visit our Active ETF Channel.