There are fears the U.S. economy could slip into a recession. So advisors and investors are revisiting the defensive attributes offered by high-quality bonds. Some ETFs, including the actively managed ALPS/SMITH Core Plus Bond ETF (SMTH ), are rewarding that show of faith.
It appears the best case scenario for Federal Reserve rate cuts this year is two. Neither have materialized yet. But the diversification and safety attributes offered by ETFs such as SMTH remain compelling.
“For decades, bonds have been a staple part of a diversified portfolio because they offered yield, liquidity, capital preservation, and diversification. And however uncertain the current environment may be, it does not alter the strategic or structural value of holding bonds,” noted Olivier De Larouziere of BNP Paribas.
Adding to the case for SMTH is that starting yields are high. As the BNP Paribas strategist points out, yields on 10-year Treasurys hover around the highest levels in two decades. That’s instructive because history shows that the higher a bond’s yield is when an investor gets involved, the shorter the odds are of success.
Want Diversification? Look to Bond ETF SMTH
One key reason advisors and investors consider bonds and ETFs such as SMTH is for diversification. Various studies confirm that a massive percentage of the risk found in 60/40 portfolios is sourced from stocks, not fixed income.
Additionally, the actively managed SMTH could be ideally suited for 2025. It could prove more responsive to inflation being stickier than hoped and/or geopolitical issues.
“Should concern about geopolitical stability continue to climb, concern about economic stability will likely follow. This should benefit traditional government bonds, while weighing on credit asset classes such as corporate bonds, the emerging markets, and private credit,” added De Larouziere.
SMTH could be poised for growth this year. That’s because the combination of bonds and active management is viewed as a growth outlet for the ETF industry. That’s been confirmed by the findings in Brown Brothers Harriman’s 12th annual Global ETF Investor Survey. In fact, some market participants could trade out of passive bond ETFs to embrace active options such as SMTH.
“Additionally, nearly 30% of investors plan to re-allocate from both actively-managed and index-based mutual funds to [ETFs. And] 33% plan to shift their passive allocation (mutual funds and ETFs) to active ETFs over the next 12 months, underscoring continuing market trends,” according to BBH.
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