Warnings are piling up for high-yield bonds. The asset class could take a big hit if the Fed’s rate hikes push the U.S. economy into a recession, sparking rating downgrades and defaults. But that hasn’t stopped investors from piling into junk bond ETFs. In fact, of the nearly $11 billion that flooded into fixed-income ETFs over the past week, $1.6 billion flowed into the iShares iBoxx High Yield Corporate Bond ETF (HYG), the most of any fund, according to Bloomberg data. It’s difficult for investors to resist yields near the highest levels of the past decade according to CreditSights. Zachary Griffiths, a senior fixed-income strategist with CreditSights, said the following on Bloomberg Television, “Yields look too good to be short. The potential for returns in the 12% area makes high-yield an attractive place to be and we’re also more optimistic on the economic front, which is very important for our call.” With money flowing into high yield and other corporate credit, demand is falling for cash-like short-term bond ETFs. For example, more than $860 million flowed out of the iShares 0-3 Month Treasury Bond ETF (SGOV) in the past week, after $6.6 billion flowed into the fund last year.

Finsum:With yields on high-yield bonds near a ten-year high, it’s difficult for investors to resist junk bond ETFs, even with warnings piling up.

The real estate market took a big hit last year as interest rates rose substantially. As debt became more expensive, real estate investors lost purchasing power. For instance, the average 30-year fixed mortgage is more than double where it was in January 2021. This led to sales of luxury homes in the U.S. falling 38.1% from the previous year during the three months ending on November 30th. According to Redfin, it was the largest decline on record. Ari Rastegar, the founder, and CEO of Rastegar Property Company believes that if investors have the liquidity and the ability to execute on investment opportunities, this is a generational buying opportunity. He noted, "This is not 2008 where the banks are jeopardized. The banks have good bills of health, we don't have these subprime loans that are going to blow up. Additionally, we are beginning to see inflation soften. The Consumer Price Index, which peaked in June at 9.1%, has been gradually declining.” He also noted investors don't have to invest in property to take advantage of this opportunity. He told Business Insider that REITs are also on clearance. Rastegar expects the multi-family and industrial property to recover the fastest and recommends looking at the Blackstone Real Estate Income Trust (BREIT) and the Starwood Real Estate Income Trust (SREIT).

Finsum:Due to a record decline in luxury home sales in the U.S., real estate investor Ari Rastegar believes this is a general buying opportunity for investors.

After a brutal year in the markets, you wouldn’t blame investors for being cautious in 2023. However, Fundstrat’s Tom Lee believes that history favors a 20% stock-market return in 2023. According to Fundstrat, “Historical data shows there is a high chance that the U.S. stock market may record a return of 20% or more this year after the three major indexes closed 2022 with their worst annual losses since 2008.” Lee basis this on the fact that in the 19 instances of negative S&P 500 returns since 1950, over half of those years were followed by the index gaining more than 20%. He and his team believe that three possible catalysts would enable stocks to produce 20% gains this year. The first catalyst is lower inflation. They expect lower inflation to set the stage for the Fed to stop raising rates and eventually start to lower them. Fundstrat also believes that wage gains will slow and volatility will fall. According to Fundstrat, equity and bond market volatility is likely to fall sharply in 2023 in response to a drop in inflation and a less hawkish Fed. Lee and his team wrote in a note that “Our analysis shows this drop in VIX is a huge influential factor in equity gains, which would further support over 20% gains in stocks.”

Finsum:Due to historical data, lower inflation, slowing wage gains, and falling volatility, Fundstrat’s Tom Less believes that the market will gain 20% or more this year.

While many model portfolios produced lackluster returns last year, there is one type of model that was able to limit losses, the bucket strategy. First developed by wealth manager Harold Evensky in 1985, the bucket strategy is a “now versus later” approach by dividing investors’ retirement savings into two segments. The first was a cash bucket to meet five years of living expenses and the second was an investment bucket for longer-term growth. Essentially the bucket strategy separates assets according to when they are going to be spent. The cash cushion was for the early years of retirement, while the growth segment was for maximizing the rest of the portfolio over a longer period. Morningstar’s Christine Benz created her own bucket portfolios which included those composed of only mutual funds and those that only included ETFs. Her three mutual fund bucket portfolios, which range from aggressive to conservative, only saw losses of 7.65% to 10.21% last year, compared with the S&P 500’s loss of 18.11%. This shows the advantages of a bucket strategy in market downturns as the downside protection from cash was able to buffer losses. Benz’s models also included allocations to short-term bonds and dividend-oriented stocks, which outperformed other bond and equity strategies.

Finsum:Morningstar’s bucket portfolios outperformed the S&P 500 last year by a wide margin due to cash buffers and exposure to short-term bonds and dividend stocks.

While rising interest rates last year battered both stocks and bonds, the rise in rates brought higher yields to the fixed-income market. According to Dow Jones Market Data, the yield on the 10-year Treasury note rose 2.330 percentage points in 2022 to 3.826%, its largest annual gain on record. The two-year Treasury yields surged 3.669 percentage points to 4.399%, while the 30-year yield jumped 2.046 percentage points to end the year at 3.934%. These marked the largest annual increases ever for those notes. The jump in yields drove investors into fixed-income ETFs last year, with BlackRock's iShares dominating inflows. In a phone interview with Morningstar, Salim Ramji, BlackRock's global head of iShares and index investments, stated "We had record flows even in one of the worst fixed-income markets. We were twice the next competitor." Based on data from Morningstar Direct, iShares attracted around $100 billion in 2022, the most among U.S.-listed ETFs that invest in fixed income. Vanguard saw the second biggest fixed-income ETF inflows with around $49 billion, followed by State Street with about $21 billion. The most popular fixed-income ETF based on inflows last year was the iShares 20+ Year Treasury Bond ETF (TLT), which gathered around $15 billion.

Finsum: In an ugly year for fixed-income markets, bond ETFs continued to see strong inflows due to higher yields with Blackrock’s iShares leading the pack.