Last year was one long coming-out party for bond exchange traded funds (ETFs), which managed to attract a cool $104.1 billion, according to Morningstar data. But if you’re expecting a repeat in 2010, that might be premature thinking.
The bond ETF market heated up in 2009, but many anticipate a bit of cooling off in 2010. Insatiable appetites for bond funds in 2009 can be explained by a few factors, including market uncertainty and weak competition from other income-producing products, such as certificates of deposit and money market funds, reports Howard J. Stock for Bank Investment Consultant.
But don’t count out bond ETFs by a long shot.
- Investors who are looking for income or for ways to mitigate risk will continue to find them an extremely appealing and efficient way to get access to the fixed-income space.
- Bonds also help counter volatility while preserving capital, which is a nice aspect in these market conditions.
- The distributions that come from bonds can help cushion the blows on the downside.
- Bond ETFs possess tax efficiency, low costs and total transparency. They also provide a kind of exposure that would be cost-prohibitive otherwise.
One thing to be mindful of, though, is the prospect of interest rate hikes. Sometime in the next 12-20 months, we’re looking at the very real prospect that the Federal Reserve will raise rates. When it happens, holders of long-term bonds are at risk of losing principal. Be on your guard and ready to act accordingly when it happens.
Here's a rundown of charts from some of the more popular bond ETFs on the market today:
- iShares Barclays Aggregate Bond (NYSEARCA:AGG)