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For illustrative purposes only.
2020 forced many people to rethink and redesign their lives.
Take fitness. Exercise equipment company revenue more than doubled to $2.3 billion from March to October as workouts went from gyms to living rooms…
…and there’s similar redesigning going on in the bond markets.
The challenges of low interest rates and high manager fees are forcing investors to rethink their bond portfolios.
The good news? There’s a workout plan that could help get your portfolio in shape – it’s called barbelling your bonds.
Let's look at what’s included.
The warmup involves taking an inventory of what role bonds are playing in your overall portfolio.
Do you hold them to diversify equity risk, to help protect your capital or to seek income?
The fact is, one bond fund can’t do all three things at the same time. So, it's important to first consider what role each fund plays, and then optimize your bond mix based on your larger asset allocation.
Take equity diversification – if you own an aggressive portfolio, where you may be investing around 80% of your wealth in the stock market and the remainder in bonds, you probably want your bonds to be higher quality and generally longer in duration, to potentially offer some protection when stocks sell off. On the flip side, if you own a conservative portfolio of mostly bonds, you may need to take greater credit risk in your bond allocation to help generate income.
Once you're warmed up and understand what bonds you have, it’s time to hit the weights and start building.
Many people tell me they pick their top 5 favorite bond managers and call it a day.
Unfortunately, that’s like working out without a plan. Those managers could be holding overlapping positions, or making bets that cancel each other out.
Barbelling your bonds is about being intentional about the risks you take in your portfolio.
The left set of barbell weights help you keep fees low and transparency high using bond index ETFs.
Just like the ETFs you use to access the stock market, bond ETFs have the benefits of low cost, potentially competitive performance and liquidity.
They let you get broad market exposure at a low cost and know exactly what you own. Market exposure is not something you should overpay for – especially in today’s low yield environment where what you spend for exposures is really going to matter.
This allows you to allocate the money you've saved in fees to your right set of barbell weights, which is dedicated to doing the things that ETFs can’t.
Here, you can use flexible and alternative active strategies to seek out new sources of potential return and true alpha, or returns that deviate from a benchmark.
Left weights, low cost market exposure. Right weights, managers that seek excess returns.
Let's look at an example. Say you want your bond allocation to provide diversification and stability. For your left weight, you could consider a broad market ETF, like iShares Core U.S. Aggregate Bond ETF, which provides broad exposure to U.S. investment-grade bonds at a very low cost. You could then look at an unconstrained active fund like the BlackRock Strategic Income Opportunities Fund, which can potentially deliver excess returns for your right weight. Combining low-cost index exposure with a flexible and diversified active strategy can result in a bond portfolio that’s fit for the future.
Financial wellness is just as important as our physical wellness.
Consider barbelling your bonds and making iShares bond ETFs a part of your fixed income allocations today. To learn more, check out the BlackRock Advisor Center or reach out to your BlackRock representative.
SPOKEN DISCLOSURE
Visit www.blackrock.com to view a prospectus, which includes investment objectives, risks, fees, expenses and other information that you should read and consider carefully before investing.
Barbelling your bonds is about being intentional about the risks you take in your portfolio.
To obtain more information on the funds, including the Morningstar time period ratings and standardized average annual total returns as of the most recent calendar quarter and current month-end, please visit:
iShares Floating Rate Bond ETF
BlackRock Floating Rate Income Fund
BlackRock Strategic Income Opportunities Fund
BlackRock Strategic Municipal Opportunities Fund
BlackRock Systematic Multi-Strategy Fund
The Morningstar RatingTM for funds, or "star rating," is calculated for managed products (including mutual funds, variable annuity and variable life subaccounts, exchange-traded funds, closed-end funds, and separate accounts) with at least a three-year history. Exchange-traded funds and open-ended mutual funds are considered a single population for comparative purposes. It is calculated based on a Morningstar Risk-Adjusted Return measure that accounts for variation in a managed product's monthly excess performance, placing more emphasis on downward variations and rewarding consistent performance. The top 10% of products in each product category receive 5 stars, the next 22.5% receive 4 stars, the next 35% receive 3 stars, the next 22.5% receive 2 stars, and the bottom 10% receive 1 star. The Overall Morningstar Rating for a managed product is derived from a weighted average of the performance figures associated with its three-, five-, and 10-year (if applicable) Morningstar Rating metrics. The weights are: 100% three-year rating for 36-59 months of total returns, 60% five-year rating/40% three-year rating for 60-119 months of total returns, and 50% 10-year rating/30% five-year rating/20% three-year rating for 120 or more months of total returns. While the 10-year overall star rating formula seems to give the most weight to the 10-year period, the most recent three-year period actually has the greatest impact because it is included in all three rating periods.
Performance data quoted represents past performance and is no guarantee of future results. Investment returns and principal values may fluctuate so that an investor’s shares, when redeemed, may be worth more or less than their original cost. All returns assume reinvestment of dividends and capital gains. Current performance may be lower or higher than that shown. Click the fund name above for most recent month-end performance and standardized performance.