With bond yields low and credit spreads tight, fixed income investors are facing myriad challenges this year. They’re finding some relief with fallen angel bonds. The VanEck Vectors Fallen Angel High Yield Bond ETF (NASDAQ: ANGL) is the dominant exchange traded fund for accessing this corner of the high-yield corporate bond market — a status that’s being solidified this year as bond investors embrace niftier spins on high-yield bonds.
The Evergrande crisis in China could spark a move into safer haven U.S. debt after another Chinese developer recently missed its bond payment. This could spur a marked shift from global investors looking at bond opportunities in China following its recovery from the pandemic.
Despite the Federal Reserve looking to raise interest rates in 2022, rates are still relatively low by historical standards, which is causing fixed income investors to look elsewhere for yield. “In this period of virtually non-existent bond yields, the search for income is prompting increased interest in junk bonds, exposing investors to more risk,” a CNBC article said. “Meanwhile, stock investors are concerned about the impact of market volatility on their portfolios.”
A predictable result of rising inflation is investors embracing Treasury inflation-protected securities (TIPS), and with the Consumer Price Index (CPI) on a torrid pace of monthly gains — not what investors want to see — market participants are scurrying to TIPS exchange traded funds.
In 2021, there is a real struggle for income. Advisors are contending with a delicate balancing act of sourcing income in a low-yield environment while avoiding taking on too much credit or duration risk. One way of striking that balance could be the WisdomTree Mortgage Plus Bond Fund (NYSEArca: MTGP) .
With the Federal Reserve apparently eyeing a 2022 interest rate increase, fixed income investors are once again contending with curveballs from the U.S. central bank. The lay of the bond land in 2021 is a vexing cocktail of low interest rates, depressed credit spreads, and the specter of a looming rate hike.
As we explore the current marketplace, fixed income exchange traded fund investors should consider what to look for from their external fixed income managers and ways that asset managers can add value. In the recent webcast, Bonding Over Fixed Income: Beyond ESG Ratings and Labels , Janelle Woodward, president of MacKay Shields LLC, highlighted the growing demand for environmental, social, and governance principles among investments and how investors have targeted this growing market segment.
With the S&P 500 inching to new highs, it’s no wonder that equities are seeing the majority of fund flows in Vanguard’s ETF suite, but a pair of bond funds are also receiving strong flows year-to-date. As part of the top five in fund flows YTD, bond funds like the Vanguard Total Bond Market Index Fund ETF Shares (BND) and the Vanguard Short-Term Bond Index Fund ETF Shares (BSV) are making the cut.
Investors can use fixed income exchange traded funds to navigate these difficult times and access potentially attractive opportunities. In the recent webcast, Navigating Fixed Income: Where to Go with Volatile Rates and Low Yields , Brian McMullen, fixed income ETF strategist at Invesco, underscored the difficulties of finding attractive yields without taking on too much risk in today’s market environment where core bond valuations are now higher than pre-COVID levels.
Getting inflation protection is one thing, while targeting duration is another. Both can be accomplished with the FlexShares iBoxx 3-Year Target Duration TIPS Index Fund (TDTT) and the FlexShares iBoxx 5-Year Target Duration TIPS Index Fund (TDTF) .
Extracting more yield in the current environment requires looking at other opportunities like emerging markets (EM), which outperformed their bond peers during the month of August. Given that outperformance, the time is right to look at ETFs like the Vanguard Emerging Markets Government Bond Index Fund ETF Shares (VWOB) .
We all know that yield can be difficult to come by lately. On top of that, interest rates seem as uncertain as ever. While that dichotomy may be daunting, there’s still opportunities to be had in today’s fixed income markets.
Bond exchange traded funds strengthened on Friday, with U.S. Treasury yields higher as investors sold off risk and positioned for the Federal Reserve meeting next week. The Federal Reserve meets for two days next week and is expected to provide further details on Wednesday regarding when it could start to taper its $120 billion in pandemic-era monthly bond purchases that have supported the economic recovery so far.