As noted in the Financial Times, investor demand for bonds is translating into record inflows for fixed income ETFs. On that note, it’s an ideal time to get core exposure amid the revival of bonds.
The macroeconomic environment is certainly conducive to bonds with interest rates expected to fall. However, the Fed could remain in flux while the economy continues to run hot, but the uncertainty further supports the case for bonds. Bond ETFs in particular are seeing interest.
“That led to an inflow of $123bn into US bond funds, including $93 billion into ETFs, in the quarter to September 30, according to data from Morningstar Direct,” the Financial Times noted.
Whether the Fed institutes rate cuts at a swift or slow and steady pace, either scenario is conducive to bonds. This could drive investor demand even higher.
“As the Fed gets going — and cuts further — you are likely to see a bigger shift into bonds. Two main drivers of our inflows this year have been expectations around Fed easing and . . . [investors] who want high quality bonds that provide diversity in periods of stress,” said Kirstie Spence, a fixed-income portfolio manager at Capital Group.
A Passive and Active Option
Investors looking to add bonds for core exposure can opt for passive or active options from Vanguard. The latter can offer more flexibility that can be beneficial in a volatile bond market, but either fund can suit a portfolio depending on the investor’s needs.
For an all-encompassing fund that offers diversified core exposure, look no further than the Vanguard Total Bond Market Index Fund ETF Shares (BND ). The fund offers exposure to a wide spectrum of public, investment-grade, taxable, fixed income securities, as well as mortgage- and asset-backed securities in the United States. This includes government, corporate, and international-dollar-denominated bonds.
BND is an ideal complement for an equites portfolio as a stand-alone product for bond exposure. That said, the fund can serve as the 40% core bonds in a traditional 60/40 portfolio split as opposed to holding individual bonds where an investor might be too concentrated in corner of the vast bond market.
As mentioned, the Vanguard Core Bond ETF (VCRB ) adds market flexibility with its active management as well as a cost-effective option with a 0.10% expense ratio. Active management allows both funds to access the knowledge of experienced portfolio managers from the Vanguard Fixed Income Group. They can adjust holdings based on current market conditions, allowing for flexibility in volatile times as opposed to passive funds.
Like BND, VCRB also focuses on the U.S. investment-grade bond market. In addition to U.S. Treasuries, the fund extends its exposure to other fixed income assets for diversification, including mortgage-backed securities and corporate securities.
For more news, information, and analysis, visit the Fixed Income Channel.
