With soaring inflation, holding cash may not be a wise decision. (Higher and higher price levels erode the purchasing power of cash savings.)
This is one of the reasons many investors hold stocks and bonds instead. But according to Mohamed El-Erian, president of Queens’ College at the University of Cambridge and chief economic adviser at Allianz SE, it might be time to shift gears.
“We need to get out of these distorted markets that have done a lot of damage,” the famed economist told CNBC.
Both the stock market and the bond market have fallen lately, and El-Erian notes that when these market corrections occur simultaneously, investors should look to “risk-free” assets.
“What we’ve learned again since mid-August is that (stocks and bonds) can both go down at the same time,” he says. “In a world like this, you have to look at short-term fixed income, and you have to look at cash as an alternative.”
You can hide your money under a mattress or put it in a savings account. Or, you can use ETFs to tap into what’s known as “short-term fixed income”.
Here is an overview of three of them.
Vanguard Short Term Bond ETF (BSV)
Vanguard is known for its low-cost ETFs that track major stock indices. Through these ETFs, investors can gain exposure to large equity portfolios.
The company does the same with bonds.
Check out the Vanguard Short-Term Bond ETF, which aims to track the performance of the Bloomberg US 1–5 Year Government/Credit Float Adjusted Index.
The fund has a heavy emphasis on US government bonds, which made up 68.2% of its holdings as of July 31. At the same time, it also invests in investment grade corporate bonds and international investment grade bonds denominated in dollars.
Right now, the 30-day SEC yield on BSV is 3.46%. The fund has a very low expense ratio of just 0.04%.
SPDR Portfolio Short Term Corporate Bond ETF (SPSB)
The SPDR Portfolio Short Term Corporate Bond ETF is another low-cost option for investors looking to access short-term bonds.
As its name suggests, the fund focuses on corporate bonds.
In particular, it tracks the Bloomberg US 1-3 Year Corporate Bond Index. Notably, corporate issues included in the index must be rated investment grade and have over $300 million or more in face value outstanding.
Currently, SPSB holds 1,196 holdings with an average coupon of 3.06% and an average maturity of 2.04 years. The fund is exposed to three business sectors: financials (47.35%), industrials (47.19%) and utilities (5.42%). The remaining 0.04% of the portfolio is in cash.
The ETF’s 30-day SEC yield is 3.98%. And just like the Vanguard fund, SPSB also has a low expense ratio of 0.04%.
Western Asset Short Duration Income ETF (WINC)
Western Asset Short Duration Income ETF is an actively managed fund. Duration, sector and individual securities are selected by management with the aim of reducing interest rate risk while providing attractive income.
The fund mainly focuses on high quality corporate bonds. But management is also looking for opportunistic exposures to add diversification and enhance yield, for example through high yield bonds, structured securities and emerging market debt.
Currently, WINC has 255 holdings with a weighted average life of 3.40 years. Its 30-day SEC yield is 4.39%.
And because this ETF is actively managed, its expense ratio is higher at 0.29%.
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This article provides information only and should not be construed as advice. It is provided without warranty of any kind.