Stick with bond funds and cash? ETF experts rethink popular portfolio strategies for 2024

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Many investors have kept money in fixed income products this year amid high rates and sticky inflation, but two experts suggest it’s time to revisit the popular allocation strategies.

A cooler-than-expected CPI print in October gave a hopeful indication that the Federal Reserve is nearing the end of its interest rate hiking campaign. According to Dan Egan, Vice President of Behavioral Finance and Investing at Betterment, investors should make preparations now for a lower-rate environment.

“We’re at the top of the mountain, where people need to start thinking about if interest rates start coming down in the next 2 to 3 years, what are good moves I need to be thinking about right now to be making?” he told CNBC’s “ETF Edge” this week.

Investors who parked cash in money market funds this year have earned yields competitive with that of the 10-year U.S. Treasury note, which topped the key 5% level in October. As of Wednesday’s market close, though, the 10-year note fell to 4.408%, while the 100 largest taxable money market funds tracked by Crane Data have an average yield of 5.20%. 

In addition, nearly $1.2 trillion has flowed into money market funds this year through Nov. 15, compared to $264 billion into bond funds and $43 billion in U.S. equity funds, according to Goldman Sachs.

“Those flows into fixed income really represent a strategic use case, [the] growing importance of ETFs from a portfolio perspective,” Matt Bartolini, Head of SPDR Americas Research at State Street Global Advisors, said in the same interview.

Bartolini suggested that as the Federal Reserve moves to lower interest rates, the popularity of fixed income products such as money markets — and the yields they offer — could falter.

“My expectation with rates coming down is we start to see that come out,” he added. “I think my expectation again would be for it to go into either equities and people re-risk, but if you’re staying within fixed income, to produce that high level of income, be in that 1- to 10-year space.”

In the meantime, Bartolini said clients willing to take on more risk should look to shorter-duration bond funds.

“You can go into the 1- to 3-year duration, use an actively managed strategy that can have that total return mindset to get higher yield [and] to mitigate some duration-induced volatility,” he said.

The iShares 1-3 Year Treasury Bond ETF (SHY) that tracks shorter-duration notes has gained 0.22% this year as of Wednesday’s close. The iShares U.S. Treasury Bond ETF (GOVT), which has exposure to Treasurys ranging between 1 and 30 years in duration, was down 1.85% during the same period.

Egan agreed it’s not too soon for investors to plan to take on additional risk.

“Setting up mental accounts, goals in various things that will allow you to say, ‘I am positioned well, I am insulated from short-term risks that I’m worried about,’ that’s going to allow me to be more opportunistic with my higher-risk budget. Do that now so that when the opportunity is there, you’re ready to pull the trigger.”

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