Bond exchange traded funds still have a place in a portfolio as a diversifier against risk selling pressures, with Wall Street indexes retreating and technology stocks lagging behind.
The Nasdaq has declined as much as 10.37% below its intra-day record level back on November 22, Reuters reports. The benchmark index was also trading around 9% below its November 19 closing record. To confirm a correction, the index has to close 10% or more below its prior record close.
Technology names are suffering the brunt of the recent hit as rising interest rate expectations weigh on the growth style.
“Big tech companies should do fine because rising rates don’t really affect them too much,” Randy Frederick, managing director of trading and derivatives at Charles Schwab, told Reuters. “But, they are getting dragged down by the fact that people are selling off the unprofitable, heavily leveraged, heavily indebted newer tech companies that have gone public recently, especially the ones that were SPACs (special purpose acquistion companies).”
Looking ahead, Frederick projects the tech sell-off will go on “till at least the next Fed meeting, which is around January 26.”
Depressed rates have helped fuel a rally in tech companies, since they make bonds less attractive and spur investors to buy riskier assets. However, as the Federal Reserve turns to fight inflation, tech stocks have lost some of their previous momentum. The higher rate outlook reduces the value that investors see in the future growth or cash flows of these fast-growing technology companies.
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Investors looking to strengthen their fixed income portfolios can consider the Avantis Core Fixed Income ETF (AVIG), which invests in a broad set of debt obligations across sectors, maturities, and issuers. AVIG pursues the benefits associated with indexing, such as diversification and transparency of exposures. However, the fund also has the ability to add value by making investment decisions using information embedded in current yields.
The Avantis Short-Term Fixed Income ETF (AVSF) also invests primarily in investment-grade quality debt obligations from a diverse group of U.S. and non-U.S. issuers with shorter maturities.
The actively managed American Century Diversified Corporate Bond ETF (NYSEArca: KORP) invests in U.S. dollar-denominated corporate debt securities issued by U.S. and foreign entities, but may also hold securities issued by supranational entities. Up to 35% of the fund’s net assets may be invested in high-yield securities or junk bonds. The fund may also invest in derivative instruments such as futures contracts and swap agreements. The weighted average duration of the fund’s portfolio is expected to be between three and seven years.
Additionally, the actively managed American Century Multisector Income ETF (MUSI) is designed for investors pursuing consistent income in a tax-efficient ETF vehicle. The team targets attractive yield throughout the market cycle while offering investors access to a diverse opportunity set of securities, including investment-grade corporates, high-yield corporates, emerging market debt, and securitized bonds.
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