I hate it when investing strategists trash bonds.
It spooks investors who have made the rational and appropriate decision to diversify their portfolio with bonds. No matter how much bonds are bad-mouthed, there's no getting around the fact that the vast majority of investors should not have all their money in stocks. Bonds generally do well when stocks are getting pounded. That's pretty much the whole reason to hold bonds right now.
Here's an example of investor uncertainty about bonds: "I am quite confused with all the negative information about bonds recently," a reader told me recently in an e-mail. She understands the impact that inflation and rising rates strategists are talking about right now would have on bond prices. "What I don't get is the potential impact on laddered bond ETF like CBO, which I own."
CBO is the iShares 1-5 Year Laddered Corporate Bond Index ETF (CBO), which is a decent choice for adding bonds to a portfolio in today's environment. Unless this investor's personal situation has changed since the time of purchase, there is no need to dump this ETF.
To answer this reader's question, CBO would likely fall in price as interest rates move higher. But for three reasons, this ETF should hold up comparatively well in a rising rate world:
1.) The CBO portfolio holds short-term bonds: They fall less than medium and long-term bonds when rates move higher.
2.) CBO uses a laddering format: The portfolio is divided evenly between bonds maturing in one, two, three, four and five years; maturing bonds are rolling over into new five year bonds, which provides an opportunity to add higher-yielding bonds to the portfolio.
3.) CBO holds corporate bonds: They'll hold up better than government bonds in a rising rate world.
CBO's not a great income producer these days, but no bond ETFs are unless they hold speculative high yield bonds. The after-fee yield to maturity for CBO – that's the best indicator of yield going forward – is 1.3 per cent. You could probably do better than that with a laddered portfolio of guaranteed investment certificates from alternative bonds, trust companies or credit unions. What you'd be giving up with GICs is the liquidity and user-friendliness of bond ETFs like CBO. You get a diversified portfolio of corporate bonds in one purchase, and adjusting the ladder each year is done for you. All in all, CBO is a sensible way to put bonds in your portfolio right now.
Rob Carrick