The widely observed Bloomberg US Aggregate Bond Index is down 12% year-to-date, confirming that 2022 will be an utterly forgettable year for bonds.
Six interest rate increases by the Federal Reserve will do that. On the other hand, all that gloominess is giving way to optimism that 2023 will be better for fixed income assets, and that could spur renewed interest in the related exchange traded funds.
With investors focusing on both the possibility of a bond resurgence as well as the combination of fixed income and environmental, social, and governance (ESG) advantages, the IQ MacKay ESG Core Plus Bond ETF (ESGB ) could be an ETF to watch in 2023. In fact, ESGB’s quality traits could be ideal for what could be a bumpy ride back in the fixed income market.
“It’s likely to be a bumpy ride due to the cross currents created by global central banks’ tightening policies, a volatile global economy, and ongoing political uncertainty here and abroad. Despite these challenges, we see opportunities in 2023 for the bond market to provide investors with attractive yields at lower risk than we’ve seen for several years,” according to Charles Schwab research.
The actively managed ESGB holds 474 bonds, which is far less than a traditional, passive aggregate bond fund. That’s a sign that just a sliver of the broader bond market credibly earns strong ESG ratings, but that’s also a signal that the combination of bonds and ESG is poised for exponential growth in the years ahead as more market participants demand access to ESG bonds.
As for ESGB’s 2023 rebound potential, several interesting factors highlight why the ETF could be uniquely positioned to deliver for investors in the new year.
“With starting yields low and the rate of change in tightening so fast, nearly every segment of the fixed income markets experienced declines, especially bonds with long durations,” added Schwab. “In fact, performance in 2022 year to date has been an anomaly. Even in past periods of sharply rising interest rates, bonds have usually delivered positive returns since the income from a bond’s coupon offset price declines. However, during 2022, without the cushion of high coupon income, returns were historically weak.”
The actively managed ESGB allocates the bulk of its portfolio to U.S. government debt, indicating that credit risk is minimal with the fund. On that note, 71.8% of its holdings are rated AAA while another 10% carry BBB grades.
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