In times of market trouble, investors look for ways to limit their exposure without giving up returns entirely. While you can opt for simple cash, the real cash rate is negative; With inflation decreasing in value, a holding of cash actually decreases in value over time. Much better than choosing cash in these situations can be exchange-traded funds (ETFs), which are designed to be stable providers of moderate returns. Selecting one or more of these funds allows investors to reduce exposure to the market while still enjoying reasonable returns.
It is important to note that although the ETFs below are generally designed to be stable, no investment is completely safe. Fortunately, however, with strong backers and liquidity, as well as large portfolios, these ETFs are among the most stable and secure avenues an investor has when it comes time to flee from market volatility.
The iShares 1-3 Treasury Bond ETF is an excellent choice for cautious investors. With around $ 19.3 billion of US Treasury notes and bonds as of 2021, maturing between one and three years, this ETF enjoys exceptional liquidity. The iShares line of BlackRock, Inc. (BLK) is one of the strongest and best established ETF providers in the business. For investors concerned about interest rates, it is worth noting that the value of SHY decreases as interest rates rise. This is due to the fact that all of your holdings are fixed rate instruments. On the other hand, SHY’s assets are backed by the full faith and credit of the US government.
Like SHY, the iShares short-term corporate bond ETF is also based on fixed-rate instruments with maturities between one and three years. Although SHY focuses on US Treasuries, IGSB is primarily made up of corporate securities. This means that while its value also decreases when rates rise, like SHY, it tends to hold assets that pay higher rates. IGSB was previously iShares’ 1-3 year credit bond (CSJ) ETF, which focused on bonds with maturities of up to three years. The fund now tracks the US corporate index ICE BofAML 1-5 Year, which allows bonds with maturities of up to five years.
A third ETF from iShares, Floating Rate Bond ETF (FLOT), joins SHY and IGSB on the list of stable products. With $ 6.5 billion in floating rate securities, issued primarily by corporations and with an average maturity of about 1.4 years from 2021, FLOT generally sees its value rise along with rates. It also enjoys high liquidity.
The State Street SPDR Portfolio Short-Term Corporate Bond ETF (SPSB) holds corporate bonds maturing between one and three years, such as CSJ. However, with no government-guaranteed bonds in its basket of $ 7.77 billion, SPSB generally enjoys higher returns than its rival starting in 2021. The flip side of the coin is that SPSB is also somewhat more volatile than the other ETFs on this list.
Perhaps the best approach for investors looking to hedge against tough markets by investing in these ETFs is to combine them. Before the rebrand from CSJ to IGSB, Forbes found that a combination of 65% FLOT, 10% SHY, 15% CSJ, and 10% SPSB produced the best combination of volatility, high returns, and low drawdowns over a period of approximately seven years. . . Fortunately for investors looking to dodge the market craze, the drawdowns and volatility were miniscule with this allocation. At the same time, while returns were subdued (which was to be expected given the objectives of these ETFs and their positions), returns recovered as interest rates rose.
This is not to say that this exact combination of these four ETFs will necessarily provide the strongest returns in the future; It would necessarily be different because CSJ has become IGSB. Certainly, if interest rates go up, there may be justification for increasing the proportion of FLOT in the mix, for example. And it is critical that investors are aware that ETFs can also face liquidity problems. If spreads on corporate bonds drift due to market changes, any of these ETFs that focus on that area could run into trouble.