Many of the most basic robo advice programs are content with simply utilizing ETFs to design portfolios. However, more sophisticated investors know that there is a place for ETFs and areas that it makes sense to use other investment to gain exposure. One particular area of concern is with bond/fixed income ETFs.
According to a recent Bloomberg article there is a growing concern about the use of bond ETFs as a proxy for fixed income investing;
Critics say these funds are potentially dangerous and untested through a crisis, but the complaints have largely fallen on deaf ears. Investors of all types, from individuals to hedge funds, have increasingly gravitated toward these funds for their low fees and easy access to entire asset classes.
Debt ETFs in the U.S. attracted nearly $100 billion over the past 12 months, boosting their assets by 20 percent, according to Bloomberg data. Passive bond funds now account for more than one-fifth of the fixed-income market, according to one measure recently reported by the Financial Times.
The critics argument rings true as there is a need to position bond investments in a way that helps to diversify maturity, yield, duration and quality. Unfortunately, bond ETFs don’t always meet those criteria.
The process of developing portfolios that are well diversified is a core philosophy of eNVESTOLOGY. This is why we spend a great deal of time searching for bond/fixed income mutual funds to provide the foundation of the fixed income component for portfolios. Yes, cost factors are an important component of the decision within this asset class, however it is not the overriding motivation. Rather, it is vital to find managers that can understand the dynamics of domestic and foreign markets in order to keep risk in check.