Due to rampant inflation, holding cash may not be a wise move. (Higher and higher price levels erode the purchasing power of cash savings.)
This is one of the reasons many investors hold stocks and bonds. But according to Mohamed El-Erian — president of Queens’ College, University of Cambridge and chief financial adviser at Allianz SE — it may be time to shift gears.
“We have to get out of these distorted markets that have created a lot of damage,” the renowned economist tells CNBC.
Both the stock market and the bond market have been falling lately, and El-Erian notes that when these market corrections occur simultaneously, investors should move into “risk-off” assets.
“What we learned again from mid-August, is that [stocks and bonds] both can fall 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 cash under a mattress or put it in a savings account. Alternatively, you can use ETFs to tap into so-called ‘short-dated fixed income’.
Here’s a look at three of them.
Vanguard Short-Term Bond ETF (BSV)
Vanguard is known for its low-cost ETFs that track major stock indexes. Through these ETFs, investors can gain exposure to large portfolios of stocks.
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 focus on US Treasuries, which represented 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 in dollars.
Currently, the 30-day SEC yield on BSV is 3.46%. The fund boasts a very low expense ratio of just 0.04%.
SPDR Short-Term Corporate Bond ETF (SPSB)
The SPDR Portfolio Short-Term Corporate Bond ETF is another low-cost option for investors looking to gain access to short-term bonds.
As its name suggests, the fund focuses on corporate bonds.
Specifically, it tracks the Bloomberg 1-3 Year US Corporate Bond Index. Specifically, corporate issues included in the index must be rated investment grade and have an outstanding par value of $300 million or more.
SPSB currently has 1,196 holdings with an average coupon of 3.06% and an average duration of 2.04 years. The fund has exposure to three corporate sectors: financials (47.35%), industrials (47.19%) and utilities (5.42%). The remaining 0.04% of the portfolio is in cash.
The 30-day SEC yield on the ETF is 3.98%. And like the Vanguard fund, SPSB also has a low expense ratio of 0.04%.
Western Asset Short Term Income ETF (WINC)
The 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.
At its core, the fund focuses on investment grade corporate bonds. But management also seeks opportunistic exposures to add diversification and improve performance, such as through high-yield bonds, structured notes and emerging market debt.
WINC currently has 255 farms with a weighted average life of 3.40 years. The 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. Provided without warranty of any kind.