Survey Says Fixed-Income Exposure Dropped to 10-Year Low in October
This article was originally published on ETFTrends.com.
October 2018 has been one to forget for U.S. equities, but in a survey by the American Association of Individual Investors, it wasn't much better for bonds as exposure to fixed-income dropped to a 10-year low, reflecting the lockstep move both asset classes made during that month of extreme volatility.
The Nasdaq Composite fell by 9.2% in October, making it its second largest decline since it fell 10.8% back in November 2008. Things weren't much better for the S&P 500, which followed the Nasdaq into correction territory and fell by 7% in October--its worst month since September 2011.
The Dow Jones Industrial Average fell 1,300 points or 5%, which hasn't happened since January 2016. Investors have been spooked by copious amounts of volatility after a decade-long bull run that has seen the growth fueled by FANG (Facebook, Amazon Netflix, Google) stocks dwindle as the technology sector fell into correction territory.
"October volatility is legendary, and we're not just talking about the crash in 2008," said S&P Dow Jones Indices analyst Howard Silverblatt. "October is a much more volatile month than any of the others as far as quick declines go."
"While this is a significant pullback, some of it does appear to be reallocation and money is sitting on the sidelines," Silverblatt added. "That should gives us a stronger base. Earnings were good but perception is everything: We expected a lot more."
No Immunity for Fixed-Income
In the pie chart below, fixed-income assets, represented by bonds and their associated funds, were not immune to the October volatility:
According to the AAII, bond allocations have a historical average of 16% and with a combined 13.3% allocation for bonds and bond funds in October, it marked the 11th consecutive time allocations in these asset classes were under the average.
"Though bond yields have been rising, individual investors have now reduced their exposure to fixed-income assets for three consecutive months," wrote Charles Wrotblut, a "Forbes Intelligent Investing" contributor. "The perception of yields remaining low on an absolute basis and expectations for a further decline in bond prices (and little upside) are causing many individual investors to eschew bonds or otherwise limit their exposure to them."
Related: Financial Advisors’ ETF Investment Trends in Today’s Environment
ETFs Still Saw Value, Short Duration Inflows
As volatility rained down on the markets in October, investors were seeking refuge in value ETFs–in particular, the iShares Russell 1000 Value ETF (IWD) . IWD saw an influx of investor capital worth $423 million, making it the second largest weekly inflow in 2018 and the most since July.
For allocations into fixed-income ETFs, most have flocked to short duration, especially with short-term rate adjustments being instituted by the Federal Reserve, investors can limit exposure to long-term debt issues and focus on maturity profiles. As a result, shorter durations are in favor on the fixed-income front to prevent prolonged exposure to a bond market that’s seen its fair share of rising Treasury yields as of late.
Examples of bond ETFs with short duration exposure include the SPDR Portfolio Short Term Corp Bd ETF (SPSB) , which seeks to provide investment results that correspond to the performance of the Bloomberg Barclays U.S. 1-3 Year Corporate Bond Index. Another option is the iShares 1-3 Year Credit Bond ETF (CSJ) , which tracks the investment results of the Bloomberg Barclays U.S. 1-3 Year Credit Bond Index, which includes debt that has a remaining maturity of greater than one year and less than or equal to three years.
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