Investors are going to chase income, safety, and momentum once again, and they will do so in long-dated, high-quality debt funds such as iShares iBoxx $ Investment Grade Corporate Bond ETF (LQD), forecasts Jim Woods, editor of Successful Investing.
“No man ever steps in the same river twice, for it’s not the same river
and he’s not the same man.” – Heraclitus
As you likely know, if you’ve been a member of the “Woods tribe” for any sustained period, I am a big fan of philosophy, and in particular Greek philosophy, such as the laws of logic promulgated by Aristotle.
Yet, I am also a fan of the wisdom of the pre-Socratic philosophers, including the philosopher who taught me how to trade options, as well as one of the earliest pre-Socratic thinkers, Heraclitus. In the above quote, Heraclitus explains that even if you think you are doing something you’ve done before, you really aren’t. The reason why is that thing isn’t the same, and neither are you.
I thought this was an appropriate thought because I am recommending the LQD, a new, yet also familiar, Income Portfolio investment.
Why transition from shorter-duration funds to longer-duration, alternative income funds like LQD? Well, under a scenario where the economy starts showing signs of slowing down (i.e., job losses, profit contraction, declining GDP) and one where we also start to see inflationary trends recede (i.e., more disinflation), there is likely going to be a massive re-allocation of capital into the long end of the yield curve.
LQD seeks to track the investment results of the Markit iBoxx® USD Liquid Investment Grade Index. The fund will invest at least 80% of its assets in the component securities of the underlying index, and it will invest at least 90% of its assets in fixed income securities of the types included in the underlying index.
When you own LQD, you own a low-cost fund (expense ratio is only 0.14%) with exposure to debt securities issued by some of the strongest companies in the world. Top holdings include bonds from Anheuser-Busch, CVS Health Corp., T-Mobile USA, Goldman Sachs, Boeing, Wells Fargo and many others. The fund recently sported a 30-day SEC yield of 4.86% with an effective duration of 8.55 years.
If the aforementioned economic factors are met, income investors are going to anticipate the Fed pivoting far sooner than its current charted course of monetary policy. The Fed may ultimately be forced to start cutting interest rates on a shortened time frame.
That would have a detrimental impact on the income generated from the shorter end of the yield curve. By contrast, longer-dated paper, and high-quality alternative debt instruments such as LQD should benefit mightily.
Recommended Action: Buy LQD.