Seek stability and income in client portfolios with bond ETFs

• Economic uncertainty and the potential impact of tariff policies has created elevated market volatility.
• Bonds can help investors seek various objectives, whether it’s to seek stability, income, or diversification.
• iShares bond ETFs can make it easy for advisors to adjust client portfolios and help position for turbulent markets.

Uncertainty around the direction of the economy and the potential impact of tariff policies are contributing to advisors reviewing the level of risk in portfolios. While stocks have historically provided growth for portfolios, bonds have provided income, stability and diversification. For advisors seeking to reduce drawdown risk and boost income, bond ETFs can support these goals.

Fixed income returns have been impacted by the latest Fed easing cycle, which hasn’t played out like historical norms. Since the first rate cut in September of 2024, intermediate and longer-term interest rates (as defined as 5-30 years) have increased by around 65 bps to a range of 4.07% to 4.66%,¹ respectively. Term premium has come back to the bond market, while overnight rates remain in the 4.25-4.50% range.²

Yields could increase quickly again. Higher-for-longer Fed policy and fiscal deficits – even with tariff revenue and spending cuts – could push investors to demand more compensation for the risk of holding long-term bonds. The BlackRock Investment Institute is currently underweight long-term Treasuries, preferring short-term notes for income.

Figure 1: U.S. Treasury Bond Yield Curve: September 2024 and March 2025

1. Seek stability with 0-3 month Treasuries: Short maturity U.S. Treasuries generally provide stability and income without adding duration risk. The duration of the 0-3 month treasuries is just 0.10 years,³ which means the prices of the bonds should be less impacted by changes in interest rates than longer term. Over the past 10 years, the average price of these bonds has been very stable, even with interest rates increasing (see chart below). The U.S. treasury yield curve remains inverted with current 0-3 month yields in the 4.3% range, which is similar to yields on 2035 Treasury bonds.⁴ iShares 0-3 month Treasury Bond ETF (SGOV) offers exposure to U.S. Treasury securities with maturities of three months or less. 

Figure 2: 0-3 Month U.S. Treasuries: Price and yield

2. Stick with the Belly of the Curve: For those advisors looking to add some duration, the belly of the yield curve as defined as 3-7 years offers similar yield with historically less volatility compared to the entire US Treasury curve. The iShares 3-7 Year Treasury bond ETF (IEI) has a duration around 4.30 years and offers exposure to this part of the yield curve.⁵

3. Hedge inflation risk with short maturity TIPS: The February consumer price index showed signs of cooling with a 2.8% YOY change.⁶ The BlackRock Investment Institute “expects inflation pressures to remain elevated given strong job growth and persistent wage pressures that suggest core inflation will stay above the Fed’s 2% policy target. Now U.S. tariffs could potentially boost inflation pressures depending on their scope and implementation. Under this backdrop, this makes the Fed unlikely to cut interest rates as much as markets are pricing in.”

One way to seek to protect purchasing power is with Treasury inflation protected securities (TIPS), which adjust the principal value of the bond based on changes in the consumer price index. TIPS bond ETFs can help solve the phantom income problem by paying out the monthly CPI adjustment in the monthly income distributions.⁷ Learn more about the Mechanics of TIPS and TIP ETFs.

Advisors may be underweight inflation linked bonds as the Morningstar Inflation Protected Bond category had $40 bn of outflows from 2022 to 2024.⁸ To add TIPS with potentially less interest rate risk, consider iShares 0-5 Year TIPS Bond ETF (STIP) as it seeks to track the front end of the TIPS market.

4. Seek Diversified Income – Income can be an important component of returns. Get access to hard-to-reach bond sectors with iShares Flexible Income Active ETF (BINC), led by Rick Rieder, 2023 Morningstar Portfolio Manager of the Year. BINC dynamically rotates risk across "plus sectors" of the fixed income market, like high yield, emerging market debt, collateralized loans and securitized assets, to pursue consistent, high income.

5. Focus on Equity Market Diversification – Core and Core Plus bond ETFs can provide ballast to portfolios. The most recent downturn in stocks (February 19 to March 11, 2025) resulted in positive total returns for bond markets as measured by the Bloomberg U.S. Aggregate Bond Index and the Bloomberg U.S. Universal Bond Index.⁹ Stock and bond correlations moved back to negative territory, making bonds more appealing again from a diversification perspective.

Using data from the March Advisor Outlook, the average advisors’ portfolios are still overweigh cash and underweight duration. Bond ETFs such as iShares Core U.S. Aggregate Bond ETF (AGG) and iShares Core Total USD Bond Market ETF (IUSB) can provide low cost exposure to core and core plus bonds.

Figure 3: Performance in stressed markets