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Blackrock: 4 Reasons Why You Should Buy Bonds ETFs, Not Stocks/Bonds
Aspire | 26 October 2015
By: Lim Si Jie
Articles (169) Profile

While markets have surged in the past three weeks and ended with consecutive weeks of gains, BlackRock’s chief investment strategist warns that you should not let that fool you. He reckons that the safest place to invest still lies in the bond market, despite the low interest rates.

However, bond ETFs should be your best bet, since it allows you the flexibility to get out any time. Here are four reasons why bond ETFs are better than bonds and stocks.

1. Volatile Conditions: Boon for Bond Investors

Concerns over the direction of the Federal Reserve’s monetary policy have resulted in whipsaws in both the stock and bond market. Fear has been factored into bond yields, leading to fluctuating bond prices. Yet BlackRock’s Jeff Rosenberg believes that this volatility can work to the advantage of bond investors.

Rosenberg notes that Fed Chair Janet Yellen ”has taken away a lot of the fear of a very soon and potentially fearful move by the Fed. He sees this as a cap signalling from The Fed on the extent of interest rate increment. Since interest rate is inversely proportional to the price of bonds, a cap on interest rates is an indication of potential capital gain from bonds.

2. ‘Paranormal’ Phenomenon

The U.S. central bank’s decision to keep interest rates unchanged in September sent stocks on a tear. Markets around the world were buoyed by the hike delay. In particular, the Dow Jones industrial average closed up 3.7 percent for the week, its second-best weekly performance of the year so far.

Rosenberg coins the term “Paranormal” as the phenomenon of “bad news means good news for the stock market”. Conventionally, bad news should logically lead to exits from the market. Yet, markets are now boosted by bad news because it further softens Fed’s resolve to end an era of cheap financing.

3. Stocks Are Too Vulnerable

While stocks have been performing relatively better compared to bonds in this volatile period, Rosenberg believes there’s too much vulnerability in risky assets like stocks. The fixed income markets have been pretty defensively positioned because of those global and international developments that the Fed warned of. On the flipside, the stock markets have not been heeding the Fed’s warnings.

4. BofA: Poor Q3 Leads to Disappointing Q4 

Source: CNBC

Based on historical patterns, the recent stock market rally could soon fade into the abyss.

Referencing to the seasonal data, Bank of America Merrill Lynch’s technical research analyst Stephen Suttmeier suggests that we will see a more lacklustre quarter than usual. According to Suttmeier, since 1928, the Q4 has a tendency to be “quite bullish”, posting an average return of 2.61 percent over the 87 years. However, things could take a different turn this time around.

Statistically, when the market has been lower through the third quarter, the fourth quarter tends to follow on that weakness. According to BofA, among the 30 instances where the market was negative at the start of Q4, the Q4 return was down by approximately 1 percent on average.

The other interesting observation is that when the market was down in Q3, the average annual return on the market is negative 90 percent of the time.

Investors Takeaway: Invest In Bond ETFs

Since interest rates aren’t going to be as high as people thought, regardless of when the Fed decides to raise them, an investment in bonds could negate the potential volatility in the stock market. Investment in bond ETFs can add much-needed stability to an investor’s portfolio.

DBX US TRSY INF (SGX: KF5)

DBX US TRSY INF, known as the US Treasuries-Inflation Linked, provides direct exposure to the US Treasury bonds. The fund invests in US Treasury-linked bonds with maturity from one year to 25 years.

ABF SG BOND ETF (SGX: A35)

Another suitable bond ETF addition into portfolio is the ABF SG BOND ETF. The Fund invests in constituents of the iBoxx ABF Singapore Bond Index, i.e. an index which tracks a basket of high-quality bonds issued primarily by the Singapore government and quasi-Singapore government entities.

Source: Nikko AM

ABF SG BOND ETF: Resilience and Diversification

One of the advantages of ABF SG BOND ETF is that the Fund is able to stay resilient and provide stable performance even during volatile market conditions.

Another advantage of investing in ABF SG BOND ETF is that returns on the ABF Singapore Bond Index Fund have historically exhibited a negative correlation when compared to the returns of other asset classes. Such a negative correlation makes the ABF Singapore Bond Index Fund an excellent portfolio diversifier for strategic asset allocation purposes to achieve reduced portfolio volatility.

Si Jie is no stranger to investing having started his journey at a young age. He is heavily influenced by acclaimed investors such as Benjamin Graham, Peter Lynch, and John Rothchild.

Please click here for more information about this author.


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