With the Federal Reserve's decision to leave interest rates unchanged and rates seemingly to remain low for now, fixed-income market watchers are reviewing their outlooks on the best places to invest now. Tom Essaye, the founder of Sevens Report Research, says in a research note that the Fed's decision to consider "global developments and muted inflation pressures," along with the U.S. economic outlook suggests the central bank won't raise rates until inflation is substantially higher. This year's fixed-income total returns on a relative, risk-adjusted basis, outperformed equities, says Marc Pfeffer, chief investment officer at CLS Investments. But he has a more cautious outlook on future returns. Here are seven of the best fixed-income investments for people to consider now.
JPMorgan Ultra-Short Income ETF
Todd Rosenbluth, senior director of exchange-traded fund and mutual fund research at CFRA, says being a short-duration fund, JPST "is less interest-rate sensitive and provides a healthy yield." This ETF (JPST) uses JPMorgan’s macroeconomic and sector research to choose bonds. It has a mix of corporate bonds, asset-backed securities and mortgage debt, along with U.S. Treasury bonds. The fund takes on some investment-grade credit risk but the effective duration is less than one year. This fund has been a favorite of his all year and continues to be as the economy remains strong. JPST's expense ratio is 0.18%, or $18 for every $10,000 invested annually, with a yield of 2.6%.
Vanguard Short-Term Corporate Bond ETF
Some experts believe that Fed Chairman Jerome Powell's December commentary suggests that there's a higher hurdle to raising interest rates than to lower them. Even so, Pfeffer says, investors should prepare for upside risk. For investors who want a slightly better return but less interest-rate risk, he suggests higher-quality credit and shorter-duration investments such as VCSH (VCSH). The fund holds investment-grade corporate bonds maturing in the next one to five years, with a weighted average maturity of three years, slightly longer than other short-term funds. The fund is heavily composed of industrial and financial sector debt. VCSH has an expense ratio of 0.5% and a yield to maturity of 2.8%.
iShares 3-7 Year Treasury Bond ETF
Although the Fed has paused, it will be hard to predict which way, if any, interest rates break out. "We don't have that much more to get to zero, but the upside could be significant," Pfeffer says. A fund like IEI (IEI) offers protection in either direction, he says. If rates rise, investors will still have money coming in fairly quickly. But if rates drop, holders are still covered for a time because of its slightly higher yield. IEI has an expense ratio of 0.15% and a yield of 2%.
Vanguard Intermediate-Term Corporate Bond ETF
Low interest rates make it cheaper for companies to borrow money, and a corporate bond fund like VCIT (VCIT) is tied into the earnings prospects of large-cap companies. Corporate bond investments performed well this year, and Rosenbluth says with interest rates staying low, investors may continue to take on a little more interest-rate risk in exchange for the above-average income benefits provided by funds like VCIT. The ETF's focus is mostly A- and BBB-grade corporate bonds, most of which expire in the next five to 10 years. The fund has an expense ratio of 0.05% and a yield of 3.4%.
SPDR Blackstone / GSO Senior Loan ETF
Bank-loan funds can be an alternative to high-yield funds. The bank-loan space offers investors a higher return if they're willing to take on a little more risk, and in the low-rate environment there is still room for these riskier funds, Pfeffer says. When choosing a bank-loan ETF, Pfeffer likes SRLN (SRLN) because it's an actively managed bond ETF. That gives the managers the option to get in or out of investments. "I've met the managers several times and I think they do a really good job," he says. It is a liquid fund with nearly $2.3 billion in assets under management. The fund holds floating-rate senior secured debt of noninvestment-grade U.S. and foreign corporations. It has an expense ratio of 0.7%.
Vanguard Mortgage-Backed Securities ETF
Chuck Self, chief investment officer for iSectors, says although this asset class underperformed other U.S. fixed-income sectors this year, that could change in 2020 now that the Fed is holding rates steady. Mortgage-backed securities lagged in 2019 because investors became concerned that falling rates capped capital gain potential when mortgages were refinanced. With rates "expected to be steady in 2020, the higher yields and shorter maturities of mortgage securities, compared to other sectors, are attractive currently," he says. VMBS (VMBS) tracks a market-weighted index of mortgage-backed securities that adjusts for the $1.5 trillion of mortgage bonds held by the Fed, he says.
iShares TIPS Bond ETF
The Fed's decision to keep rates low for the foreseeable future suggests the central bank is essentially targeting higher inflation, even though it hasn't officially said so, Essaye says. Inflation can be a major problem for bonds because it lowers the purchasing power owners receive from bond interest, but inflation isn't expected in the next few quarters, he says. If the Fed allows inflation to tick higher, then that can be positive for Treasury inflation-protected bonds, he says, which are linked to increases in the cost of living. The biggest ETF by assets under management is TIPS (TIP), with about $20 billion in assets under management. It tracks the Bloomberg Barclays US Treasury Inflation Protected Notes Index. It has an expense ratio of 0.19%. An alternative is the Schwab U.S. TIPS ETF (SCHP), which tracks the same index but costs 0.05%.
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