By Christine Idzelis
Is 60-40 the right mix of stocks and bonds?
Hello! This week’s ETF Wrap gives you a look at the findings in Charles Schwab’s latest annual ETF survey as well as how Thursday’s economic data rippled through the bond market.
Please send feedback and tips to christine.idzelis@marketwatch.com or isabel.wang@marketwatch.com. You can also follow me on X at @cidzelis and find me on LinkedIn. Isabel Wang is at @Isabelxwang.
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The volatile bond market hasn’t turned off millennials, with investors in that generation in particular embracing exchange-traded funds for their exposure to fixed income, a survey by Charles Schwab’s asset management business found.
Millennials’ relatively high use of fixed-income ETFs stood out in the survey, David Botset, managing director and head of equity product management and innovation at Schwab Asset Management, told MarketWatch during an interview Wednesday on the sidelines of the Schwab Impact 2023 conference in Philadelphia.
Schwab found that millennial ETF investors have an average 45% of their portfolios allocated to fixed income, compared with 37% for Generation X and 31% for Baby Boomers.
The U.S. bond market has suffered broad losses this year amid heightened volatility as interest rates continued to climb, following a steep drop for investment-grade bond ETFs in 2022. Schwab’s survey, conducted from June 13 — June 28, included individual investors between the ages of 25 and 75 with at least $25,000 in investable assets.
Millennials may be attracted to the higher yields now available in the bond market, while also getting more comfortable with using ETFs for fixed-income exposure after seeing the fund structure work well through volatile patches in the markets, according to Botset.
He described millennials as being familiar with the ups and downs of markets, including such turbulent times such as the global financial crisis of 2008 and the COVID-19 crisis in 2020 as well as around the regional-bank failures earlier this year.
Generally, investors like ETFs because they can easily trade in and out of them, but also because the funds are a tax efficient and low-cost way to diversify portfolios, according to Botset.
Within fixed income, Schwab Asset Management announced in September that it reduced the operating expense ratios for the Schwab High Yield Bond ETF SCYB and Schwab U.S. TIPS ETF SCHP, bringing fees for its entire fixed-income ETF lineup to just three basis points.
Is 60-40 the right mix?
Among ETF investors, 63% view the traditional portfolio consisting of 60% stocks and 40% bonds as the right mix to meet their financial goals, according to the Schwab study. On average about 39% of their portfolios are in fixed income, with 61% in equities, the survey found.
Some bond investors may be looking to “lock in rates” before the Federal Reserve begins to lower interest rates again, should the economy weaken into a recession, said Botset. Meanwhile, the U.S. economy sharply expanded during the three months through September.
The market is largely expecting the Fed to hold its benchmark interest rate steady at its policy meeting next week, after the Bureau of Economic Analysis on Thursday estimated that U.S. gross domestic product jumped to an annual rate of 4.9% in the third quarter.
“Our expectations are for slower GDP going forward as positive contributions from volatile net exports and inventories are unlikely to be repeated,” said Lindsay Rosner, Goldman Sachs Asset Management’s head of multi-sector fixed income investing, said in emailed comments on Thursday. She said that Goldman “will be monitoring developments in private domestic demand — consumption and investment — rather than headline GDP.”
‘Does not move the needle’
Fed-fund futures point to the central bank maintaining its benchmark rate at 5.25% to 5.5% at its policy meeting that concludes Nov. 1 and for the remainder of 2023, according to CME FedWatch tool, at last check. The Fed has aggressively hiked its benchmark rate from near zero in March 2022 to a 22-year high after its last increase in July in a bid to bring down inflation.
The third-quarter GDP report “does not move the needle for the November FOMC meeting which is certainly a skip,” Rosner said. “Higher and hold, yes. Higher and hiking, no.”
Read: Why T. Rowe Price’s CIO thinks 10-year Treasury yields may keep rising — and how he’s positioned in markets
Bond ETFs were broadly climbing on Thursday afternoon as Treasury yields were falling.
Shares of the Vanguard Long-Term Treasury VGLT were up around 1.4% while the Vanguard…
Read More: Millennials seem to dig bond ETFs despite volatile fixed-income market, Charles