Record Stock Rally and 24-Year Peak Yields Pull Cash Into Bonds, Testing 60/40 Portfolios

A record $525 billion has poured into bond ETFs this year, Nate Geraci, president of NovaDius Wealth Management, says. Losses are nonetheless showing up in many bond categories, squeezing the 40% fixed-income sleeve of the 60/40 portfolio.

The 60/40 portfolio puts 60% of assets in stocks and 40% in bonds. Stock prices at record highs supported the equity side, Geraci says, while bond holdings were hurt by rates at their highest levels in decades.

Why Are Losing Bond Funds Still Drawing Money?

NovaDius operates as a registered investment advisor. On CNBC's ETF Edge program, Geraci said fixed-income ETFs took in more than $75 billion in the past month.

According to Geraci, the flow of funds ran along the yield curve, the graph that maps yields against maturities. Some investors kept cash in short maturities to collect yields above 4%; others went after larger payouts in longer-dated bonds.

Even so, many bond ETFs are still carrying losses this year, Geraci said, especially long-duration products. Duration is a measure of how much a bond's price moves in response to changes in rates.

State Street Investment Management, meanwhile, tallied $469 billion flowing into US-listed bond ETFs through September, another record. Geraci did not identify the tracker or cutoff date he relied on.

The S&P 500 reached a record peak on October 6. During that same week, the 10-year Treasury yield climbed to its highest point since 2002.

Can Managed Futures Remedy the 60/40 Portfolio?

Some investors, Geraci said, now want strategies that do not move as closely with stocks and bonds.

Managed futures ETFs can fill that role, he explained, since they trade futures contracts and can short bonds or take long positions in the dollar and oil.

He described them as a diversifier for times when other parts of a portfolio are not working. However, he offered no performance figures.

Andrew Beer, who founded managed-futures specialist Dynamic Beta Investments, was slated for a follow-up segment with Geraci.

Alternative ETFs collected $31 billion through September, according to State Street, helped in part by bonds offering weaker protection in stock selloffs.

With bond ETFs and alternative funds both taking in billions, ETFs now appear to serve the yield trade as well as hedging needs.