One of the primary reasons investors allocate to bonds is to smooth out volatility attributable to equities. But they also do because fixed income instruments are gemerally suitable for long-term holding periods.
Both cases are sensible when considering various studies confirming that over lengthy time horizons, a significant percentage of the risk in a 60/40 portfolio comes via the 60% equity sleeve. ETFs such as the ALPS/SMITH Core Plus Bond ETF (SMTH ) can mitigate some of that turbulence. And it can do so while providing the buffering effects investors are looking for.
The fast-growing actively managed ETF has $1.74 billion in AUM. It has the flexibility to capitalize on credit and duration opportunities. And that could potentially tap into the insurancelike element of owning longer-dated bonds. However, though the ETF’s effective duration is 6.48 years, it puts it in intermediate-term territory. As Cullen Roche, the founder and chief investment officer of Discipline Funds, said in a recent interview with Morningstar, more duration is an insurance policy of sorts during recessions and deflationary periods.
“They’re so interest-rate-sensitive that they perform best in a deflationary or a recessionary environment. And so they almost operate like an insurance component of a portfolio in these very unusual acute periods,” he said.
Potential SMTH Perks
SMTH attempts to beat the Bloomberg U.S. Aggregate Bond Index. That index comprises largely U.S. Treasuries and agency debt. It also has some exposure to corporate bonds. As an actively managed ETF, SMTH isn’t beholden to the exact specifications of that index. But it devotes over 62% of its weight to Treasuries and mortgage-backed securities.
Accounting for that significant allocation to U.S. government debt, it’s not surprising SMTH encountered some headwinds amid recent jitters in the Treasury market. But the ETF has clawed back some of those losses.
Additionally, Roche believes Treasuries remain the dominant form of sovereign debt in the world. That’s a status unlikely to be usurped by other large economies.
“The US financial market is still just so much bigger, so much more secure, so much safer than every other financial market that I don’t see a scenario where, for instance, German bunds or Japanese government bonds become close competitors in terms of their safe-haven stature,” he told Morningstar.
Income investors are often tempted by international bonds due to higher yields. And while not all ex-U.S. government bonds are risky, SMTH could offer advantages in the form of Treasuries being inherently reliable and America’s status as the largest economy in the world.
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