Fixed income investors already invested in bonds could see a holiday treat this year with a Christmas rally. For those still pondering the idea, now could be an ideal time for bond exposure.
A blog post in Real Investment Advice noted the historical drop in yields during the last seven Decembers. From a technical standpoint (as noted in the charts below from Real Investment Advice), the dollar is reaching overbought levels. And they could recede soon with yields to follow. Of course, when that happens, bond prices gain given their inverse relationship.
The blog also cited a correlation with oil prices, as yields have yet to drop to similar levels. Oil prices have fallen more than 6% in the last six months. If yields can follow a similar path, bond prices stand to benefit.
That said, investors looking to get bond exposure don’t have to settle for individual debt issues. To remove the guesswork as to which bonds to use to build a portfolio, a simple solution is the Vanguard Total Bond Market Index Fund ETF Shares (BND ).
BND is an ideal complement for an equites portfolio as a stand-alone product for bond exposure. 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 U.S. This includes government, corporate, and international-dollar-denominated bonds.
Given its broad diversification, BND 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 one corner of the vast bond market.
An Active Bonds Option
Active bond funds have been gaining in popularity as of late, allowing investors more flexibility in a bond market that will see a new presidential administration take office at the start of the new year. To help ease the uncertainty, bond funds like the Vanguard Core Bond ETF (VCRB ) put the bond holdings in the hands of skilled professionals.
Furthermore, VCRB is a cost-effective option, as it has a 0.10% expense ratio, quelling any fears that active funds might be deemed too expensive. 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.
Similar to 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.
