In a brutal year for fixed income assets, some advisors and investors may be looking for tax loss harvesting ideas or positioning for a 2023 bond rebound. Those are reasonable views to take as some market observers are forecasting just one more rate hike of 50 basis points this year by the Federal Reserve and perhaps as little as one of just 25 basis points in the first quarter of 2023. If that’s accurate, it could be music to fixed income investors’ ears and provide support for exchange traded funds such as the IQ MacKay ESG Core Plus Bond ETF (ESGB ).
As its name implies, ESGB provides investors with the increasingly desired combination of broad-based bond exposure and environmental, social, and governance (ESG) benefits. Another reason to consider ESGB is the simple point that bonds rarely perform as poorly as they have this year.
“It’s rare for high quality fixed income investments to have negative total returns over a 12-month period,” noted Charles Schwab’s Cooper Howard. “For example, since 1976, there have only been 65 instances out of 550 total where the broad fixed income index was down over a 12-month period. That’s just shy of 12% of all instances. It’s even more rare for both stocks and bonds to be down at the same time over a 12-month rolling period.”
Heading into year-end and 2023, the ESGB case is bolstered by the fact that the ETF is actively managed. That means managers have flexibility to look for fixed income value, credit opportunities, and mitigate interest rate risk — all desirable traits in this environment and beyond. There are other factors in ESGB’s favor heading into 2023.
“Returns have been historically weak this year for two primary reasons—starting yields were very low and the Federal Reserve’s pace of rate hikes has been very rapid. Since March the Fed has increased the federal funds target rate five times, pushing it up from near zero to a range of 3% to 3.25%. It has been the fastest and most aggressive pace of tightening going back to the early 1980s. However, we believe that going forward the pace of rate hikes will slow and ultimately stop,” added Howard.
ESGB holds 442 bonds and attempts to beat the Bloomberg U.S. Aggregate Bond Index. More than a quarter of the fund’s holdings are Treasuries, so credit quality is strong with 71.8% of ESGB components rated AAA.
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