Consider this before joining the bond ETF stampede

Individual bonds and bond ETFs are two completely different animals

John Gabriel 16 February, 2010 | 9:51AM
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Upon reflecting on the 2008 credit crisis, many investors might have realised that they were too concentrated in equities and that a balanced portfolio of stocks and bonds could have mitigated their downside considerably. Sure, most asset classes plunged in the back half of 2008 amid the global deleveraging crisis. However, lest we forget, in a monumental "flight to safety" we saw a rally of epic proportions in Treasuries.

We hope that most of the approximately €6.3 billion (£5.7 billion) in new assets that flowed into fixed-income exchange-traded funds in 2009 were not just chasing performance. But, considering what we know about general investor behaviour, it's probably not too far off to conclude that fear and panicked buying also likely helped fuel the massive inflows into bond ETFs and funds last year. (According to the European Fund and Asset Management Association, through November of 2009 fixed-income funds accounted for €71.9 billion of the €139.4 billion in total net inflows into UCITS-compliant open-end funds). Over the course of the year many ETF providers also rolled out new products to match the growing demand for bond funds.

Now, as the lurking risks of bond investments make headlines, some are speculating that flows could slosh back out of bond ETFs and funds in search of higher returns elsewhere. In our view, rather than trying to time the market, investors would be much better off in the long run by thinking about their fixed-income exposures as part of a long-term asset-allocation strategy.

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About Author

John Gabriel  is an ETF strategist with Morningstar, responsible for Canadian ETF research.

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