Bond ETFs touted as ‘efficient gateway’ to resilient portfolios

As investors seek to mitigate risks and enhance returns, Janus Henderson has highlighted why bond exchange-traded funds (ETFs) can be crucial towards building resilient portfolios.

With diversification understood to be a cornerstone of a prudent investment strategy, ETFs investing in bonds are an effective way to achieve this beyond traditional equities, the fund manager observed.

“As markets become increasingly volatile, the importance of including a variety of asset classes, such as bonds, cannot be overstated,” it explained.

In particular, it flagged investors should seek to minimise reliance on any one asset class, especially in the face of “deceptive” market highs.

“It’s crucial for investors to stay alert and proactive, even during strong market performances. Recognising such patterns, experienced investors often take this as a cue to shift towards more defensive assets,” Janus Henderson said.

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By divesting some appreciated assets, investors will be able to allocate to more stable, income-producing assets, such as bonds, while also locking in profits.

The fund manager continued that ETFs can be pivotal for capital growth and preservation.

While ETFs were once seen as a low-cost, stock market tracking product, the emergence of actively managed ETFs on Australian exchanges in recent years can prove fruitful in navigating market volatility, it pointed out.

“Some active equities ETFs, for example, have rules to buy or sell less than their index benchmark to minimise the impact of turbulent markets.

“In a similar way, there are active fixed income ETFs that adjust their weightings to sectors of the bond or cash markets to mitigate risks such as interest rate hikes or cuts,” it said.

Previous research by State Street named the growth of active funds as one of its top trends set to fuel the rise of ETFs globally in 2025, with almost a third (28 per cent) of survey respondents describing the growth and use of active ETFs to have the most significant impact on the ETF industry next year.

According to Janus Henderson, making the most of opportunities in bond ETFs can offer protection against volatile market movements while benefiting from bonds rallying in the face of evolving macroeconomic conditions.

“In an environment where inflation is falling, it is likely there are rate cuts which in turn raise bond yields to become attractively priced,” it said.

“When share markets appear inflated and overvalued, diversifying into fixed income via ETFs can be a prudent strategy.

“The accessibility provided by fixed income ETFs and anticipated positive trends in the bond market means investors have compelling reasons to consider this approach for preserving capital and achieving stable returns.”

Last month, new findings from VanEck revealed almost all financial advisers are using ETFs in their client portfolios, up from 87 per cent in 2020, with the heightened appetite driven by evolving portfolio strategies and the superior performance of ETFs compared to active funds.

Janus Henderson also described the introduction of fixed income ETFs as an “evolutionary moment” in the democratisation of investing.

Bond markets, which have been historically larger than share markets, have often been difficult to access due to large minimum investments of around $500,000 as well as its complexity.

However, depending on the stockbroker, “you can access a professionally managed fixed income portfolio for as little as $500,” Janus Henderson said.