How to integrate bond ETFs into your portfolio
From vanilla ETFs to responsible investing
Marketing Communication
Diversified portfolios tend to perform better in the long run and can help mitigate risk exposure, typically by having allocations to corporate and government bonds as well as equities. Bonds are also known as fixed income investments, because they pay a set rate of annual interest. In the past, they often gave lower returns than equities, but would also have been less volatile in particular over short to medium term horizons. Having said that, bonds have also performed well during some periods when equities have fallen. This means that having a proportion of an investment portfolio allocated to fixed income may reduce its overall volatility1, and potentially deliver more consistent returns over the long term.
The potential advantages of ETFs
Investors looking to include corporate and government bonds in their portfolios may wish to consider the convenience of exchange-traded funds (ETFs). Fixed income ETFs are a type of investment fund designed to replicate the performance of a group of bonds. They are similar to bond index funds, but a key difference is that ETFs can be traded on the stock exchange in the same way as individual equities.
Through a single transaction, bond ETFs provide a level of diversification that would be difficult for most investors to replicate through purchasing individual bonds. Amundi ETF offers a comprehensive range of bond ETFs: some track indices that only hold bonds issued by governments in Europe or the US, for example, while others focus on indices of corporate or government bonds that meet certain responsible investing requirements, as we will discuss later.
Similar to mutual funds, ETFs have portfolio managers who instruct trades on behalf of the fund in order to achieve its investment objective. However, for ETF managers, these decisions are guided by replicating the index performance as closely as possible. The expected performance of the ETF before fees is in line with that of its underlying market, giving investors a degree of certainty in expectations.
In contrast, one of the main objectives of active managers is to outperform an index or benchmark. They use various methods to help them determine which assets can help them achieve the fund goals. Actively managed funds charge a premium fee for this outperformance objective, which is one of the contributing factors to the higher fees of actively managed funds.
Because ETFs are traded on stock exchanges, they are highly liquid – which means they can be bought or sold with little fuss. While ETFs are a relatively new type of investment asset – they gained mainstream popularity in the 2000s – they have proven themselves to be resilient in challenging market conditions, such as during the early months of the Covid-19 pandemic in 2020 when they continued to trade efficiently.
Bond ETFs can be traded on the stock exchange in the same way as individual stocks
Bond ETFs and responsible investing
While the use of environmental, social and governance (ESG) factors to assess equity investments is well-established, bond investing has been slower to embrace ESG criteria. Over the last few years, however, a wide range of responsible bond funds, indices and ETFs have emerged.
Indeed, Amundi launched one of the first green bond ETFs in 2017. The take-up of such investments rose during the pandemic as investors’ awareness of the importance of ESG-related issues increased. Research suggests that companies that perform better in terms of ESG criteria are less likely to default on their bond payments2, while other studies have found a positive correlation between companies that behave responsibly towards the world and those that are profitable3.
Amundi now offers several bond ETFs that are based on indices that use responsible investment criteria as a basis for including or excluding fixed-income holdings. This makes it easier than ever for investors to incorporate fixed income investments into their portfolios that are aligned with their own views.
Building a portfolio with bond ETFs
As mentioned previously, including bond ETFs in an investment portfolio may increase its diversification and reduce risk, leading to more stable returns over the long term. In some circumstances, bond holdings can help mitigate losses when equity markets are underperforming. Fixed income investments may at times also manage risk during times of uncertainty, such as changes in interest rates or the effects of inflation.
Generally speaking, the higher the percentage of bonds versus equity in a portfolio, the lower its overall risk and potential returns. The most appropriate proportion of bonds in an investor’s portfolio will depend on their attitude to risk as well as their investment goals and time horizons. Investment advisers often talk about a ‘60/40’ portfolio, which refers to a portfolio made up of 60% equity investments and 40% bonds. It is important to bear in mind that this precise mix might not be suitable for everyone, and the ‘60/40’ portfolio has been the subject of some debate owing to a challenging 2022 when both equities and bonds endured negative returns. However, it can provide a good starting point for investors looking to create a balanced portfolio.
To find out more about our fixed income strategies or to view our full range of bond ETFs, just visit our website:
FIXED INCOME HUB
FIXED INCOME PRODUCT SUITE
Amundi ETF Main Risks
1 Volatility measures the amplitude of price variations in a financial asset over a given period. The greater the price variation - on both upside and downside - over a shorter timescale, the greater the volatility. The historical volatility of a financial asset can be calculated taking the annualised Standard Deviation of its return during a defined period. 2 https://ficonsulting.com/wp-content/uploads/2022/04/FI_ESG_WP_2022.pdf3 https://capitalmonitor.ai/sector/tech/link-between-esg-investment-exists-new-research/
Risk of the loss of invested capital. Investors may not get back the original amount invested and may lose all of their investment.
Risk associated with the markets to which the ETF is exposed. The price and value of investments are linked to the liquidity risk of the components. Investments can go up as well as down.
Risk associated with the volatility of the securities/currencies composing the underlying index.
The fund investment objective may only be partially reached.
Information on Amundi’s responsible investing can be found on amundietf.com and amundi.com. The investment decision must take into account all the characteristics and objectives of the Fund, as described in the relevant Prospectus. When investing in an ETF, it’s important to carefully review the fund’s prospectus. As with any investment, it’s advisable to assess your investment goals, risk tolerance and seek professional advice before making investment decisions. PLEASE NOTE THAT CAPITAL IS AT RISK. YOUR CAPITAL IS FULLY AT RISK AND YOU MAY NOT GET BACK THE AMOUNT ORIGINALLY INVESTED.
