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Trade War Drags On: Time to Buy Bond ETFs?

Sweta Jaiswal, FRM

President Trump’s tweet on May 5 has altered the landscape of the U.S. and global stock markets. The S&P 500 has lost for the third consecutive week while the Dow Jones is moving toward its sixth straight week of losses. In fact on May 29, only three of the 30 blue chips ended in the positive territory post the trading session (read: Dow on Longest Losing Streak in 8 Yrs: 5 Stocks Still Up in ETF).

Global markets have not been spared either. Weakness has been observed in Japan’s Nikkei, Hong Kong’s Hang Seng and France’s CAC 40 markets, to name a few.

The Backdrop

Trump dealt fresh attacks in the latest round of the trade spat. The American President increased tariff to 25% from 10% on Chinese goods worth $200 billion effective May 10 midnight, and has threatened to levy another 25% tariff on an additional $325 billion of Chinese goods. In retaliation, China seeks to impose as much as 25% tariff on U.S. imports worth $60 billion, effective Jun 1. Additionally, Trump has banned Chinese firm Huawei Technologies and 26 of its affiliates from doing business with American companies, though it has provided a 90-day exemption.

If speculations are to be considered, China is planning to strike back by imposing a ban on rare-earth minerals export to the United States. The effects of this can be catastrophic for America as its manufacturers in major industries like defense, oil refineries and technology are struggling with supply shortages, delay and rising raw material prices. China can also go to the extent of restricting U.S. firms manufacturing machinery and electronics within Chinese regions from easily accessing rare-earth materials (read: What's Behind the Recent Surge in Rare Earth ETF?). 

If we go by The New York Times article, there are chances of America limiting China’s access to its stock markets. Thus, with the looming uncertainty over a truce between the economies, one may feel the urge to opt for safer investments.

Is Bond ETF Investing in Vogue Now?

It has been noticed that the U.S. 10-year treasury yield is trading below that of the three-months U.S. treasury yield (as of May 29, 2019) (read: Recession Fear Lurking: ETFs & Stocks to Play).

This apparent inversion of the yield curve can be pointing toward an impending recession for the U.S. economy. Also, some economists expect U.S. economic growth to decelerate to below 2% on an annual basis in the second quarter, after hitting a better-than-expected 3.2% in the first.

Moreover, minutes from Fed’s meeting in March reflect a dovish stance with less chances of a rate hike this year.

These factors have been compelling investors to shift to safer bets like Government Bond ETFs.

ETFs to Beat the Heat

Against this backdrop, we discuss some bond ETFs which can help investors to cash in on the trade war tumult.

Municipal Bond ETFs

Municipal funds have seen a good start to 2019. Actively-managed muni ETFs were more in demand than passively managed funds. The tax reform (or cuts) had put muni bonds under pressure in the initial days of Trump administration. But the evaporation of the State and Local Tax impelled investors to decide on muni ETFs (see all Municipal Bond ETFs here).

iShares National Muni Bond ETF MUB

MUB tracks the S&P National AMT-Free Municipal Bond Index before fees and expenses. The index measures the performance of investment-grade U.S. municipal bonds. The income received in the form of interest from these bonds is exempt from federal taxes and alternate minimum taxes. The fund has AUM of $12.82 billion and charges 7 bps in fees. It has 3788 holdings in its basket (read: Tap Muni Market With an ETF-Of-ETFs Approach).

iShares Short-Term National Muni Bond ETF SUB

SUB tracks the S&P Short Term National AMT-Free Municipal Bond Index, before fees and expenses. The index measures the performance of investment grade U.S. municipal bonds of shorter maturities. The fund has AUM of $2.28 billion and charges 7 bps in fees. It has 1045 holdings in its basket.

VanEck Vectors AMT-Free Intermediate Municipal Index ETF ITM

ITM tracks the Bloomberg Barclays AMT-Free Intermediate Continuous Municipal Index before fees and expenses. The index measures the performance of medium-duration bonds. The fund has AUM of $1.74 billion and charges 24 bps in fees. It has 2836 holdings in its basket (read: Muni Bonds Off to Best Start Since 2006: 5 Hot ETFs to Buy).

Government Bond ETFs

Long-term Treasury bond ETFs have been on the rise of late and are expected to maintain it, at least in the near term. Below, we have profiled some ETFs which are poised to gain from trade tensions (see: all Government Bond ETFs here).

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. The fund has AUM of $964.7 million and charges 7 bps in fees. It has 50 holdings in its basket (read: Intensifying Trade Woes Trigger Rally in Treasury ETFs).

iShares 20+ Year Treasury Bond ETF TLT

TLT tracks the ICE U.S. Treasury 20+ Year Bond Index. The index measures the performance of investment grade debt securities which are issued by the U.S. government with a residual maturity of more than 20 years. The fund has AUM of $13.56 billion and charges 15 bps in fees. It has 35 holdings in its basket (read: How China Could Retaliate Huawei Ban & Its Impact on ETFs).

Vanguard Extended Duration Treasury ETF EDV

EDV track the performance of the Bloomberg Barclays U.S. Treasury STRIPS 20–30 Year Equal Par Bond Index. The fund provides diversified exposure to the long-term Treasury STRIPS market. It has AUM of $1.04 billion and charges 7 bps in fees. It has 81 holdings in its basket (read: Why Should You Buy Treasury ETFs Now?).

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VanEck Vectors AMT-Free Intermediate Municipal Index ETF (ITM): ETF Research Reports
 
iShares 20+ Year Treasury Bond ETF (TLT): ETF Research Reports
 
iShares National Muni Bond ETF (MUB): ETF Research Reports
 
Vanguard Long-Term Treasury ETF (VGLT): ETF Research Reports
 
Vanguard Extended Duration Treasury ETF (EDV): ETF Research Reports
 
iShares Short-Term National Muni Bond ETF (SUB): ETF Research Reports
 
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