Bonds Are Doing What They’re Supposed to Do. That’s a Good Thing

Advisors and investors typically embrace bonds for two primary reasons: income and portfolio protection in the event equities decline.

Regarding the latter point, that’s another way of saying diversification. However, there have been years in which bonds betrayed their propensity for diversification — a scenario that only works in investors’ favor when bond prices are rising. That betrayal evaporate last year when bonds and ETFs such as the ALPS/SMITH Core Plus Bond ETF (SMTH) behaved as expected, delivering income and reduced correlations to stocks.

For investor looking to add fixed income exposure or get involved with the asset class for the first time this year, there’s good news. The appeal of ETFs such as SMTH is increasing because professional market observers suspect that bond will continue executing on their intended purposes in 2026.

SMTH Could Be Bond ETF Star in 2026

SMTH is an actively managed ETF and a rapidly growing one at that. Active management is a potentially beneficial trait in the fixed income space. That’s particularly true when it comes to serving the aim of enhancing portfolio diversification.

“I think we do believe that bonds are an effective diversifier to equities. It doesn’t hold every minute of every day, but it holds over the long run. And I think when we’re in this environment now, when we have the higher income, they’re in a position to do that again,” noted Morningstar’s Sara Devereaux.

SMTH’s status as an actively managed ETF is pertinent for other reasons. Those include the ability to seek income opportunities while potentially providing investors with the buffer they’re looking. That’s a legitimate consideration at a time when artificial intelligence (AI) and geopolitical headlines are unnerving plenty of equity investors.

“We’re back in a more normal environment, where you have that income, today what you get is that ballast where bonds can rally and if bonds sell off, you have a head start, just to do the simple bond math,” added Devereaux. “You have a 5% coupon out of a five-year bond. It could back up a 100 basis points and all you would lose is one year’s worth of income, right? So, I think that that ballast is there.”

Bottom line: With bonds doing what they’re supposed to do, it might be time to think outside the box. Consider aggregate bond strategies and tap the benefits of active management.

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