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In times of market trouble, investors look for ways to limit their exposure while not foregoing returns entirely. While one could choose plain cash, the real rate of cash is negative; with inflation chipping away at value, a cash holding actually declines in value over time. Far better than choosing cash in these situations may 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 cut market exposure while still enjoying reasonable returns.
It’s important to note that, although the ETFs below are generally designed to be stable, no investment is entirely secure. Fortunately, though, with solid sponsors and liquidity as well as large portfolios, these ETFs are among the most stable and safe avenues that an investor has when it comes time to flee market volatility.
The iShares 1-3 Treasury Bond ETF is an excellent choice for cautious investors. With about $19.3 billion of U.S. Treasury notes and bonds as of 2021, maturing between one and three years, this ETF enjoys exceptional liquidity. BlackRock, Inc.’s (BLK) iShares line is one of the best-established and strongest ETF providers in business. For investors concerned about interest rates, it’s worth noting that SHY’s value declines as interest rates rise. This is a result of the fact that all of its holdings are fixed-rate instruments. On the other hand, SHY’s assets are all backed by the full faith and credit of the U.S. government.
Like SHY, the iShares Short-Term Corporate Bond ETF is also founded in fixed-rate instruments with maturities between one and three years. While SHY focuses on U.S. Treasuries, though, IGSB is made up primarily of corporate securities. This means that, while its value also declines when rates go up, like SHY, it tends to hold assets that pay higher rates. IGSB was formerly the iShares 1-3 Year Credit Bond ETF (CSJ), which focused on bonds with maturities up to three years. Now, the fund tracks the ICE BofAML 1-5 Year US Corporate Index, which allows bonds with maturities of up to five years.
A third iShares ETF, the Floating Rate Bond ETF (FLOT), joins SHY and IGSB on the list of stable products. With $6.5 billion in floating-rate securities, primarily issued by corporations and with an average maturity of roughly 1.4 years as of 2021, FLOT usually sees its value increase along with rates. It also enjoys high liquidity.
State Street’s SPDR Portfolio Short Term Corporate Bond ETF (SPSB) holds corporate bonds maturing between one and three years, like CSJ. Without government-guaranteed bonds in its $7.77 billion basket, though, SPSB generally enjoys higher returns than its rival as of 2021. The flip side of this is that SPSB is also somewhat more volatile than the other ETFs on this list.
Perhaps the best approach for investors looking to guard against tough markets by investing in these ETFs is to combine them. Prior to the rebranding of CSJ to IGSB, Forbes found that a mix of 65% FLOT, 10% SHY, 15% CSJ and 10% SPSB brought about the best combination of volatility, high returns and low drawdowns for a period of roughly seven years. Fortunately for investors looking to dodge market craziness, drawdowns and volatility were miniscule with this allocation. At the same time, although returns were moderate (which is to be expected, given the aims of these ETFs and their holdings), returns picked up as interest rates climbed.
This is not to say that this exact mix of these four ETFs will necessarily provide the strongest returns going forward; it would necessarily be different because CSJ has become IGSB. Certainly, if interest rates rise, there may be justification for increasing the proportion of FLOT in the mix, for instance. And it’s crucial for investors to be aware that ETFs can face liquidity concerns as well. If corporate bonds spreads are thrown off due to market shifts, any of these ETFs focusing on that area could experience trouble.
