ETF Expert

Back in the day when bonds acted as a safer haven, investors often rotated out of stocks and into bonds. Since the March lows, however, all assets have gone up together.

In fact, during the credit collapse, virtually everything went down together. Stocks, non-U.S. Treasury bonds, currencies, commodities, REITS, MLPs, preferred shares, precious metals – it really didn’t matter. Liquidity was king.

It stands to reason, then, if we really have entered some kind of “new normal,” investors won’t be content to park their profits/capital in the perceived safety of bonds. Instead, they would be running to cash.

Here is the performance of popular, non-U.S. Treasury bond ETFs since the S&P 500 hit an intra-day high on 10/21/09… 5 trading days ago:

It seems to me that investors aren’t in a state of panic… like they were in September and October of 2008. At that time, investors liquidated iShares Investment Grade Bond (LQD), pushing the exchange-traded fund down -20% in a matter of weeks! Note: Approximately the same liquidation damage had been levied on iShares Intermediate Credit (CIU) last year as well.

In the current “bearishness,” where investors are taking profits and pulling back from risk, LQD has actually held its ground. CIU? Same story.

In all, this tells us that credit crisis fears have abated. It also tells us that we’re not seeing massive liquidation, but rather, a more typical rotation into less risky, investment grade bonds.

So before you give into the notion that this pullback is the big bad bear’s return, recognize that pullbacks and corrections are supposed to occur. “New normal” or not, profit taking and asset class rotation should be expected.

When will big bad bearish realities return to the markets with ferocity? It’ll likely depend on the U.S. dollar; that is, hopelessly X-TREME devaluation would be catastrophic, while unanticipated X-TREME strength would result in carry-trade unwinding worldwide.

If you’d like to learn more about ETF investing… then tune into “In the Money With Gary Gordon.” You can listen to the show “LIVE”, via podcast or on your iPod.

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