Be Very Careful When Buying Fixed Income For a Safety Net (BND, SHY, HSTRX, EMB, HYG)

Many investors are looking at fixed income investing for the first time as a 'safety net' for their portfolios. And indeed fixed income is on the whole less volatile than the equity market, but investors need to be very picky and selective within the fixed income universe to truly obtain relative safety and little correlation with stocks.

Many areas of the fixed income market behave very much like stocks. Emerging market debt, developed foreign debt, high yield corporate, and to some extent investment grade corporate all are correlated with equities to varying degrees.

At one point in 2008 for instance the Ishares Emerging Market Bond ETF (NYSE: EMB) was down 36% in 2 months time and the Ishares High Yield Corporate ETF (NYSE: HYG) was down 38% from April 2008 to March 2009. Both of these have outperformed equities over the last 3 years to be sure, but they are far from 'safe havens'.

Better alternatives for safety and diversity from stocks would include Ishares 1-3 Yr T-bond ETF (NYSE: SHY), Hussman Strategic Total Return Fund (HSTRX), and Vanguard Total Bond Market ETF (NYSE: BND). All of these funds are up over the past 2 years, and even during 2008 the maximum retreat for any of these was less than 10% from peak to trough.

When chasing yield in these low yield times, don’t forget about the capital risk that goes along with it.