Give clients' cash more earning potential with bond ETFs
March 23, 2023
March 23, 2023
Did last year's volatile markets, inflation fears, and likelihood of a recession have your clients keeping their money parked on the sidelines?
In response to a persistently strong inflation environment in the U.S., we've witnessed extraordinary hawkishness from the Federal Reserve that has increased the nominal U.S. yield curve to a level not seen since 2011. Across the yield curve, bonds are now set to deliver healthy yields, with 10-year projected returns following suit.
While the road may be bumpy, your clients have the opportunity to lock in yields that haven't been this high in years. Plus, more clarity on monetary policy should bring flows back into fixed income. Particularly bond ETFs.
While fixed income investors have been later adopters of ETFs, the tides appear to be shifting in favor of these bond vehicles. Two monumental episodes—the pandemic of 2020 and the interest rate volatility of 2022—have reshaped the mold of the typical bond investor. Tactical trading has increased and tax-loss harvesting activities have picked up, accelerating the trend from bond mutual funds to bond ETFs.
2022 industry fund flows ($B)
Is now the time to consider shifting some of your clients' cash allocation into bond ETFs? Your clients can get yield for an attractive price while easily getting broad-based exposure to the bond market versus having to build a laddered portfolio of individual bonds.
According to research by Vanguard Portfolio Analytics and Consulting Service, average bond ETF allocations within advisor fixed income sleeves have jumped from 25% prior to the pandemic, to 37% at the end of 2022.
Bond ETFs are generally more liquid than the underlying bonds that make up their portfolios. If not for the liquidity available through bond ETFs, there would likely be much more selling pressure on fixed income securities in the primary market during periods of market volatility.
Because much of ETF trading occurs on the secondary market, with little to no direct impact on the underlying securities, ETFs act as shock absorbers—particularly during these periods of market stress.
U.S. Fixed income ETF's - secondary-market ratio
If you have clients ready to put their cash to work in the fixed income space, then you should consider an allocation to high-quality, broad-based bond ETFs that are the stalwarts of our lineup.
Our bond ETFs enable you to invest in as few or as many ETFs as you see fit to complete the bond piece of a client’s portfolio. Each Vanguard bond ETF offers you low-cost access to a wide variety of bonds in a single investment.
If you're looking for broad coverage of the domestic bond market in one low-cost investment, then our Total Bond Market ETF (BND) covers all aspects of the U.S. bond market.
BND offers you a way to manage your portfolio in a single, diversified investment as it holds more than 8,000 domestic, investment-grade bonds.
And if you're looking for greater flexibility, you'll find Vanguard ETFs that provide broad coverage of the U.S. investment-grade fixed income market. You can recreate the government/credit portion of the Bloomberg Aggregate Index by investing in our short-, intermediate-, and long-term bond ETFs. Shifting allocations allows you to fine-tune a portfolio's interest rate and credit risk while maintaining exposure to the total U.S. bond market.
These ETFs give you access to U.S. government; high-quality (investment-grade) corporate; and investment-grade, international, dollar-denominated bonds with varying ranges of maturities.
Get that cash into motion by integrating or expanding bond ETF use in client portfolios. That way, you can potentially optimize the many benefits ETFs can bring to a portfolio, including lower costs, relatively easy diversification, flexibility tied to their tradability, and tax efficiency.
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