Investors are cautious about the stock market.
Government bonds ETFs are less risky.
Government bond ETFs still outperform savings and CDs.
Over the past 10 years, we have had two financial crises that have made people fear the markets. We had the dot-com bubble in 2000 and the financial crisis is 2008-2009. This has caused people to become more cautious with what they do with their money. Gallup had a poll at the beginning of the year which states that more than 50% of the people interviewed don't think the market should be invested in, and only 54% still have money invested in the stock market. This is 13% lower than its high in 2002. People still fear the market, even though the Dow was at its all-time high of 16,530.94 when the article was published. Since then, it has climbed to 17,000.
If people are scared of investing then, where are they putting their money? Most other options would include keeping it in a bank. These are safer options as FDIC insurance covers the principal. However, the rates are usually less than 1%. If people think this is a good strategy, they would be wrong. People who do this are still losing money, as inflation over the past three years has been higher than any bank rate. The inflation rates can be seen here.
I think there is a way for people to get more comfortable and ease themselves back into investing. I would suggest that they start out by investing in U.S. government and corporate bond ETFs. These look to be safer investments than stocks and non-bond ETFs. The four investments I would start looking at are Vanguard Short-Term Bond ETF (NYSEARCA:BSV), PIMCO Enhanced Short Maturity Strategy ETF (NYSEARCA:MINT), Schwab U.S. Aggregate Bond ETF (NYSEARCA:SCHZ), and Vanguard Short-Term Government Bond Index ETF (NASDAQ:VGSH). These seem to be the safest when looking at their default risk, price change, and yield. The table below shows a summary of these securities. I believe these are the less risky ETFs because:
- They all have some investments in U.S. government securities, and never in our history has the U.S. defaulted on its debts.
- 99% of the corporate bonds composing these ETFs are investment-grade and very unlikely to default.
- The average maturity is low, especially for MINT. When bonds mature in a year or less, the interest rate risk will be almost zero, and these ETFs should be fairly liquid and have no redemption risk.
|Type||Ave. maturity (Yrs.)||Inception||Price range||Holdings||12-month yield|
|BSV||Government and Corporate bonds||2.7||4/3/2007||74.22-81.98||1932||1.13%|
|SCHZ||Government and Corporate bonds||6.83||7/14/2011||49.93-52.87||1767||2.00%|
|MINT||Government and Corporate bonds||0.72||11/16/2009||100.02-101.63||464||0.68%|
There are other factors that make these ETFs look attractive. One is the number of holdings. BSV and SCHZ each have over 1,000 holdings. This gives a nice cushion in case any of the individual holdings default. VGSH has the smallest number of holdings, but is composed of U.S. government bonds that mature in 3 years or less. There may not be a lot of those to invest in. Since these bonds mature in a short time frame, there is probably a lot of turnover in what VGSH holds. I don't see this being a problem. The yields on these are also good for investors. None of the yields are worse than what you could get in a CD or money market account. SCHZ has the highest yield, at 2%. This is because the average maturity is almost 7 years, so it has interest rate risk while the others don't. The last item to note on why these are a good choice is that the prices don't move much. BSV has the greatest movement and has a $3.88 swing. MINT has the least amount of price swing, at $.80. SCHZ, which has the greatest yield, only swings $1.47. I think how much a stock or ETF movement in price is relevant for people who don't want to invest in the market. Investors can lose a lot of principal when the market goes down. These people could be more worried about keeping their principal than having the stock price increase. If people knew there were investments out there that would hardly budge during a downturn, they may be more willing to start to invest. Below is what a $10,000 investment would look in these four ETFs, with no dividend reinvestment. I also used the best 1-year CD rate I could find among the biggest banks. The best I could find for in Iowa was a .1% APR 1-year CD rate from U.S. Bank (NYSE:USB).
Ending Bal. of initial shares
Dividends + leftover initial amount not invested
U.S. Bank CD
One can see that if an investor invested $10,000 in each ETF and the CD at each inception date of each ETF, the ETFs outperform the CD. The worse-performing was VGSH, and that still made $79.33 more than the CD. Even if some of these ETFs don't outperform inflation, you would still be better off investing in the ETFs than putting your money in a bank.
Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.