Achieving balance within an investment portfolio is critical, especially when managing risk across different asset classes. Bonds serve as a crucial component in this regard, offering stability and reducing the fluctuations often associated with stock investments. Over extended periods, research indicates that a significant portion of the risk in a diversified portfolio originates from its equity holdings. In light of this, financial instruments like the ALPS/SMITH Core Plus Bond ETF (SMTH) provide investors with a mechanism to dampen market turbulence while delivering desired protective effects.
The SMTH ETF exemplifies the growing trend of actively managed funds, boasting assets under management exceeding $1.74 billion. Its flexibility allows it to capitalize on opportunities related to credit quality and bond durations, which may incorporate elements akin to insurance through longer-term bonds. Although classified as an intermediate-duration product due to its 6.48-year effective duration, experts highlight its potential value during economic downturns or deflationary phases. As noted by Cullen Roche, founder and chief investment officer of Discipline Funds, these bonds can act as a safeguard during challenging periods, performing exceptionally well amid deflation or recession scenarios.
Beyond its defensive characteristics, SMTH aims to surpass the performance of the Bloomberg U.S. Aggregate Bond Index, traditionally dominated by U.S. Treasury securities and agency debt, with some corporate bond exposure. Through active management, SMTH enjoys greater freedom in its composition, allocating over 62% of its weight to government-backed instruments. Despite recent market volatility affecting Treasury prices, the ETF has demonstrated resilience, recovering much of its prior losses. Furthermore, Roche emphasizes the unparalleled dominance of U.S. Treasuries in the global sovereign debt landscape, attributing their security and scale to unmatched safe-haven status.
While international bonds might attract income seekers with higher yields, SMTH underscores the reliability of U.S. government bonds, supported by America's position as the world's largest economy. This focus on domestic securities ensures consistent safety and stability, aligning with long-term investment strategies. By incorporating such tools into their portfolios, investors not only protect against market uncertainties but also harness the benefits of a robust and secure financial system.
