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Is it the Right Time to Buy Bond ETFs? Let's Explore

Sweta Jaiswal, FRM

The Sino-US trade spat ambiguity, rising Middle East tensions, uncertainty in market conditions due to geopolitical tensions, slowdown in the global economy and Brexit woes are making investors jittery, adding to the lure of the bond ETFs. Also, the Fed has cut rates for the second time in September 2019 which is a positive for the fixed income funds. In fact, the Bloomberg Barclays U.S. Treasury index has returned nearly 8% in 2019, moving steadily toward beating the returns of the past four years. 

Also, the start of the impeachment inquiry into President Trump and the approaching 2020 elections have added to market uncertainties, which might drive investors toward bonds (Best & Worst Zones of This Year and Their ETFs).

Let’s look at the factors that are shaping the geopolitical scenario.

Trade War Uncertainties

With the trade negotiation talks scheduled between the United States and Chinese officials in October, Trump government’s potential move to limit capital flows into China and to set limitations for Chinese companies from trading on U.S. exchanges may worsen market conditions. Per a MarketWatch report, there was a 0.5% decline in the S&P 500 index and 0.3% fall in Dow Jones Industrials Average on Sep 27, following the news.

Brexit Suspense

The Eurozone economy has been struggling as the third-quarter end approaches, thanks to declining demand for goods and services. The persistent global trade disputes and the prolonged process involving Britain’s exit from the European Union have been the primary reasons for the slowdown (read: Eurozone ETFs in Focus on Weak PMI Data).

Middle East Tensions

The controversies regarding Iran’s involvement in the Saudi Arabian drone strikes have heated up geopolitical tensions in the Gulf region. Notably, Yemen’s Houthi rebels claimed responsibility for the attacks. However, per a Reuters article, Saudi Arabia has expressed concerns over the utilization of Iranian weapons to carry out the raids. Moreover, secretary of state, United States,  Michael Pompeo blamed Iran for this disruption while the allegation was denied by Tehran. In fact, U.K. Prime Minister Boris Johnson has also put the onus on Iran for the attack (read: Leveraged Oil & Energy ETFs to Play on Saudi Attack).

However, Iran continues to deny its role in the drone attacks and has warned of a possible “all-out war” if any retaliatory action is taken against the country.

Should You Opt for Bond ETFs?

Against this backdrop, we discuss a few bond ETFs which can help investors cash in on the rising global tensions.

iShares Core U.S. Aggregate Bond ETF AGG

The fund provides broad exposure to U.S. investment-grade bonds and tracks the Bloomberg Barclays US Aggregate Bond Index  (read: First-Half 2019 ETF Asset Flow Roundup).

AUM: $66.0 billion

Expense Ratio: 0.05%

YTD Return: 6.2%

Vanguard Total Bond Market ETF BND

The fund provides broad exposure to U.S. investment grade bonds and tracks the  Bloomberg Barclays U.S. Aggregate Float Adjusted Index (read: August ETF Asset Report: Gold Tops).

AUM: $45.37 billion

Expense Ratio: 0.04%

YTD Return: 6.5%

iShares iBoxx $ Investment Grade Corporate Bond ETF LQD

The fund provides exposure to a broad range of U.S. investment grade corporate bonds and tracks the Markit iBoxx USD Liquid Investment Grade Index.

AUM: $36.11 billion

Expense Ratio: 0.15%

YTD Return: 12.6%

Vanguard Intermediate-Term Corporate Bond ETF VCIT

The fund seeks to provide a moderate and sustainable level of current income. It invests primarily in investment-grade corporate bonds and tracks the Bloomberg Barclays U.S. 5-10 Year Corporate Bond Index.

AUM: $24.98 billion

Expense Ratio: 0.07%

YTD Return: 10%

Vanguard Long-Term Treasury ETF VGLT

VGLT tracks the Bloomberg Barclays U.S. Long Treasury Bond Index. The fund seeks a high and sustainable level of current income through investment in government bonds (read: Play the Bond Bull Market With These ETFs).

AUM: $1.22 billion

Expense Ratio: 0.07%

YTD Return: 17.1%

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Vanguard Long-Term Treasury ETF (VGLT): ETF Research Reports
 
Vanguard Intermediate-Term Corporate Bond ETF (VCIT): ETF Research Reports
 
iShares Core U.S. Aggregate Bond ETF (AGG): ETF Research Reports
 
Vanguard Total Bond Market ETF (BND): ETF Research Reports
 
iShares iBoxx $ Investment Grade Corporate Bond ETF (LQD): ETF Research Reports
 
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