The Most Boring Column Ever

Investors often think that bonds are boring. Indeed, some investors wish that bonds could be more like equities, with larger price appreciation potential.

Indeed, bonds are nothing like equities. While equity holders have a stake in the future of a business, bond holders simply loan money to the company, for which they receive interest over an agreed period, after which the bond nominal is repaid. In unpredictable times, though, bonds’ predictable cash flows can be a strength.

We are increasingly fielding questions from individual investors worried that despite their unexciting nature, bond ETFs have fallen in value. However, in the currently unfolding market turmoil, headlined by the Russian invasion of Ukraine on 24 February and increased expectations of rate hikes to combat inflation, they generally have not lost nearly as much value as equities - even if they have not been entirely invulnerable.

Fund Performance, %

Source: VanEck. Data from 31 May 2021 to 13 June 2022, Gross Return in EUR. Past performance is not a reliable indicator of future returns.

In particular, well-heeled investors value bonds for their regular income and relatively low price volatility. Bonds are issued by governments or companies, which are effectively borrowing from investors over a fixed period and, usually, paying fixed¹ coupon income in return.

In times of rising interest rates, newly issued bonds usually pay higher coupons than existing bonds and provide more attractive income opportunities. Hence, existing bonds have less value for investors and their market value falls. However, it is important to realise that the issuer still pays the pre-set coupons and repays the bond when it matures, so an investor’s cash flows do not change. Conversely, bond prices tend to converge to their issue prices the closer they are to maturity. Moreover, any cash from maturing bonds can be reinvested in higher yielding bonds, which can benefit the investor.

I always recommend that investors take a prudent approach. They should have diversified portfolios of equities and bonds, with the bonds acting as stabilisers. Think back to the global financial crisis about fifteen years ago: global equities fell more than 50% by some measures yet having part of your portfolio in bonds would have cushioned against losses.

Of course, there are different types of bonds with differing risk profiles. At VanEck, we have a range of bond ETFs to suit individual investors’ appetites for risk and return. They are summarized in the table below.

VanEck bond ETFs: a range of returns and risks

Alternatively, an investor could buy one of our multi-asset ETFs, which already have a mix of equities, bonds and real estate⁴. Designed to diversify risk and return, they come in three blends – higher, medium and lower risk.

Overall, though, it’s wise to remember at volatile and difficult times that boring predictability can be surprisingly attractive.