When interest rates rise, bond prices fall. And as we saw in 2022, when the S&P 500 fell 18.1% , a tightening cycle by the Federal Reserve can be hard on investors of all stripes. But now, with inflation ebbing, investors who have been content to seek yields of 5% or higher on bank certificates of deposit or in money-market funds may be well served to add back some risk, according to Mike Loewengart, the head of portfolio management for Morgan Stanley Portfolio Solutions.
During an interview, Loewengart pointed to a risk faced by people with CDs. A depositor knows how much interest will be received and when, but there is no guarantee that when a CD matures, interest rates won’t have declined. “Any investor who has a longer-term horizon, and even retirees, still need to protect their purchasing power,” he said.
With interest rates still high, this may be a good point to buy shares in a bond fund. These portfolios tend to trade at discounts to face value in the current environment. This means investors will enjoy capital gains as bonds mature, or take comfort from rising prices in the meantime if interest rates decline.
The S&P 500 itself is weighted by market capitalization. That means Apple Inc. AAPL , Microsoft Corp. MSFT , Amazon.com Inc. AMZN , Nvidia Corp. NVDA and two common-share classes of Alphabet Inc. GOOGL GOOG together make up nearly 24% of the portfolio of the SPDR S&P 500 ETF Trust SPY , which tracks the benchmark index.
“Investors have an opportunity to regain their equity exposure in a more risk-managed way,” which includes “complementing” cap-weighted exposure with some equal-weighted exposure, Loewengart said. A different type of equity-income fund that aims for high monthly distributions of dividend income from the stocks it holds, as well as fee income from covered call options, is the $28 billion JPMorgan Equity Premium Income ETF JEPI . The fund’s co-manager Hamilton Reiner explained its strategy in an interview.