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El-Erian Sends Warning In The Stocks And Bonds Market

Daniel Plainview

Updated: September 12, 2022

assets recession
Editor’s Note:

EDITOR'S NOTE: When inflation erodes the purchasing power of cash, many investment firms advise their clients to get into stocks and bonds to keep pace with or even outpace inflation. But right now, as Allianz SE’s Mohamed El-Erian warns, both stocks and bonds can go down simultaneously. So he advises looking for short-term bonds instead of the traditional 30-year Treasuries that most investors seek for safety. If you listen to any market expert who’s not associated with an investment firm, many would recommend gold as a safe haven. They may differ in regards to the size of allocation or the timing of the purchase, but gold would be recommended nevertheless. El-Erian isn’t wrong in warning investors to shift to short-dated bonds. But that is only one among a few other assets one can hold. Here’s where investors can learn from various central banks. Gold plays a significant role in diversifying its reserves against the US dollar. And that’s what American investors should be doing now—hedging against the dollar through assets that don’t depend on it as its primary source of monetary value.

Due to rampant inflation, holding cash may not be a wise move. (Higher and higher price levels erode the purchasing power of cash savings.)

That’s one of the reasons many investors have been holding stocks and bonds instead. But according to Mohamed El-Erian — president of Queens’ College, Cambridge University, and chief economic advisor at Allianz SE — it might be time to switch gears.

“We need to get out of these distorted markets that have created a lot of damage,” the famed economist tells CNBC.

Both the stock market and the bond market have been tumbling lately, and El-Erian notes that when these market corrections happen simultaneously, investors should move to “risk-off” assets.

“What we have again learned since the middle of August, is that (stocks and bonds) can both go down at the same time,” he says. “In a world like that, you have to look at short-dated fixed income, and you have to look at cash as an alternative.”

You can hide your cash under a mattress or put them in a savings account. Or, you can use ETFs to tap into the so-called “short-dated fixed income.”

Here’s a look at three of them.

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Vanguard Short-Term Bond ETF (BSV)

Vanguard is known for its low-cost ETFs that track major stock market indices. Through these ETFs, investors can gain exposure to large portfolios of stocks.

The company does the same with bonds.

Check out the Vanguard Short-Term Bond ETF, which aims to track the performance of the Bloomberg U.S. 1–5 Year Government/Credit Float Adjusted Index.

The fund has a strong focus on U.S. government bonds, which represented 68.2% of its holdings as of July 31. At the same time, it also invests in investment-grade corporate bonds and investment-grade international dollar-denominated bonds.

Right now, the 30-day SEC yield on BSV is 3.46%. The fund boasts a very low expense ratio of just 0.04%.

SPDR Portfolio Short Term Corporate Bond ETF (SPSB)

SPDR Portfolio Short Term Corporate Bond ETF is another low-cost option for investors looking to gain access to short-term bonds.

As its name suggests, the fund focuses on corporate bonds.

In particular, it tracks the Bloomberg U.S. 1-3 Year Corporate Bond Index. Notably, the corporate issues included in the index have to be rated investment grade and have more than $300 million or more of outstanding face value.

Right now, SPSB has 1,196 holdings with an average coupon of 3.06% and an average maturity of 2.04 years. The fund has exposure to three corporate sectors: finance (47.35%), industrial (47.19%), and utility (5.42%). The rest 0.04% of the portfolio is in cash.

The 30-day SEC yield on the ETF is 3.98%. And just like the Vanguard fund, SPSB also has a low expense ratio of 0.04%.

Western Asset Short Duration Income ETF (WINC)

Western Asset Short Duration Income ETF is an actively managed fund. The duration, sector, and individual securities are selected by management with the goal of reducing interest rate risk while providing an attractive income.

At its core, the fund focuses on investment grade corporate bonds. But management also seeks opportunistic exposures to add diversification and improve yield, such as through high yield bonds, structured securities, and emerging market debt.

Right now, WINC has 255 holdings with a weighted average life of 3.40 years. Its 30-day SEC yield is 4.39%.

And because this ETF is actively managed, its expense ratio is higher at 0.29%.

What to read next

This article provides information only and should not be construed as advice. It is provided without warranty of any kind.

Originally published on Yahoo Finance.

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