Exchange Traded Funds (ETFs) are baskets of securities that are traded on stock exchanges in the same way people buy and sell stocks. These funds can include a variety of assets such as stocks, commodities, or bonds, and are popular for their ease of trading and broad market exposure. Bond ETFs specifically focus on investments in bonds, offering an efficient way to diversify investment portfolios beyond traditional stocks.

Diversification remains a cornerstone of prudent investment strategy, essential for mitigating risks and enhancing returns across various market conditions. In this regard, bond ETFs play a crucial role by offering investors an effective tool to diversify their portfolios beyond traditional equities. As markets become increasingly volatile, the importance of including a variety of asset classes, such as bonds, cannot be overstated.

Minimise reliance on any single asset classes

Market highs can be deceptive, often leading to unforeseen volatility. It’s crucial for investors to stay alert and proactive, even during strong market performances. Recognising such patterns, experienced investors often take this as a cue to shift towards more defensive assets.

By divesting some appreciated assets, investors not only lock in profits but also have an opportunity to redirect their capital into more stable, income-producing assets like bonds. This move not only preserves capital but also broadens the portfolio’s diversification, minimising reliance on any single asset and reducing overall market risk.

ETFs for capital growth and preservation

ETFs originally laid claim to being a low cost, stock market tracking product, yet in more recent years since they have become so much more.

There is an array of actively managed ETFs on Australian exchanges that are specifically designed to navigate volatile markets. Some active equities ETFs, for example, have rules to buy or sell less than their index benchmark to minimise the impact of turbulent markets. In a similar way, there are active fixed income ETFs that adjust their weightings to sectors of the bond or cash markets to mitigate risks such as interest rates hikes or cuts.

In many ways, the introduction of fixed income ETFs were an evolutionary moment in the democratisation of investing. Historically larger than share markets, bond markets were difficult to access due to large minimum investments ($500,000 plus) and complex forms. Nowadays, depending on the stockbroker, you can access a professionally managed fixed income portfolio for as little as $500. One example is the Janus Henderson Tactical Income Active ETF (TACT), which trades on the Cboe exchange. It allows individual investors access to a professionally managed fund with the ability to invest in cash, fixed and floating interest rate securities (including government and semi-government bonds), asset backed securities, corporate securities and bank securities or hybrid products that are usually only available to wholesale investors.

Taking advantage of a ETF such as TACT can do more than just protect against a volatile share market. With changing macroeconomic forces, bond markets themselves are able to rally. In an environment where inflation is falling, it is likely there are rate cuts which in turn raise bond yields to become attractively priced.

When share markets appear inflated and overvalued, diversifying into fixed income via ETFs can be a prudent strategy. The accessibility provided by fixed income ETFs and anticipated positive trends in the bond market means investors have compelling reasons to consider this approach for preserving capital and achieving stable returns. By leveraging the benefits of fixed income ETFs such as those offered by TACT, investors can enhance their portfolios and navigate market uncertainties with greater confidence.

Seizing opportunities with TACT

Investing in TACT not only provides protection against the volatility of the share market but also positions investors to capitalise on potential upswings in the bond market due to changing macroeconomic conditions. With forecasts suggesting rate cuts in the near future, bond yields are expected to become more attractive, presenting a favourable scenario for bond investors.

By incorporating fixed income ETFs such as TACT into their investment strategies, investors can achieve a balanced, diversified portfolio that withstands market fluctuations and yields stable returns.

This article is part of a comprehensive series by Janus Henderson designed to help investors make the most of ETFs. Stay tuned for more insights and strategies to expand your investment knowledge and optimise your portfolio. Learn more

 

Investing involves risks. More information about TACT can be found here.