As U.S. equity markets march on toward new highs amid geopolitical uncertainty, many investors are starting to shift away from high-risk assets and move toward more stable classes such as fixed income. In this article, we take a close look at the state of the bond market and identify three key bond-related funds that many are considering as part of their diversified investment strategy. (For a quick refresher, check out: Bond Basics Tutorial.)
Adding exposure to high-quality bonds that are actively managed in a risk-controlled way has never been easier. For many retail investors, the simple choice is the PIMCO Active Bond ETF, which comprises 733 holdings and has total net assets of over $2.1 billion. Taking a look at the chart below, you can see that the exchange-traded fund (ETF) is trading within a defined uptrend and that it has consistently been able to find support near the 50-day moving average and the ascending trendline. Based on this chart, we would expect active traders to look at buying as close to the trendline as possible since it maximizes the risk/reward setup. Stop-loss orders will likely be placed below the trendline in case the recent pullback continues. (For more on this topic, check out: Introduction to Bond Investing.)
When it comes to seeking assets that generate solid income, it is not unsurprising for many to turn to corporate bond funds. One of the most popular in this segment is HYG. For those who are unfamiliar with this ETF, HYG carries an expense ratio of 0.49% and has total net assets of over $18 billion. Fundamentally, this ETF consists of more than 1,000 high-yield corporate bonds from across the U.S. and is generally a favorite of those seeking higher yield than what is available in traditional bond funds. Taking a look at the chart below, you can see that HYG is trading within an extremely strong uptrend. The current risk/reward suggests that traders will be looking to buy over the days and weeks ahead and that the price of the fund could likely trend higher for the remainder of 2017. (For more, see: 5 Basics Things to Know About Bonds.)
Conservative investors that are interested in moving capital into a cash-like position but are concerned about the impact of inflation over the medium term may want to take a look at TIP. More specifically, this ETF is the go-to choice for those seeking exposure to U.S. government bonds but wishing to have the face value rise with inflation. With total net assets of over $23 billion, TIP is one of the most popular choices of ETFs for those interested in bonds, and as you can see from the chart, it is trading near a significant level of support. The combination of the 50-day moving average and the upper trendline of the channel pattern will likely be used as technical guides for the placement of buy orders, and most traders will likely hold a bullish outlook on TIP until the price closes below $113.79 or $112.93, depending on risk tolerance. (For further reading, see: 3 ETFs to Protect Your Retirement From Inflation.)
The Bottom Line
As markets continue to trend toward new highs and global volatility starts to increase, it could be a good time to consider increasing exposure to bonds via bond ETFs such as those mentioned above. Based on the charts, bonds have been gaining traction over recent weeks and appear poised for strong gains heading into the final months of 2017. (For more, see: Top 5 Bond ETFs for 2017.)
Charts courtesy of StockCharts.com. At the time of writing, Casey Murphy did not own a position in any of the assets mentioned.