Boring, reliable bonds have been the saviors of investment portfolios this year. As of mid-May, the Bloomberg Barclays US Aggregate Bond Index, which tracks investment-grade bonds, was up 4.9% for 2020 versus an 11.4% loss for the S&P 500. Amid the current financial crisis, invest only in bonds from issuers with the highest credit ratings—they can be relied on to make all interest payments and return your principal upon maturity.
Because the Federal Reserve will likely hold its benchmark interest rate near zero for the next year or two, the risk of rising interest rates, which hurt bond prices, is not a major factor now.
If you don’t have the expertise to compose a diversified portfolio of bonds, invest in an exchange-traded fund (ETF).
Choose from these three ETFs based on your risk tolerance…
For moderately conservative investors: Vanguard GNMA Fund (VFIIX) invests in more than 15,500 mortgage-backed securities, most of which are issued by the Government National Mortgage Association (Ginnie Mae). It delivers better yields than comparable US Treasuries because its bonds are hurt slightly more than Treasuries in rising-rate environments. Recent yield: 1.81%. 2020 return: 3.5%.*
For more conservative investors: iShares Core US Aggregate Bond ETF (AGG), with nearly 7,500 holdings, tilts toward extreme safety. About three-quarters of its portfolio is in Treasuries and other US government–backed bonds. Some exposure to high-quality corporate bonds helps boost its yield. Recent yield: 1.58%. 2020 return: 5%.
For ultra-conservative investors: Vanguard Short-Term Treasury ETF (VGSH) invests in about 100 US short-term government bonds with maturities of three years or less, which means very little default or interest rate risk. Recent yield: 0.17%. 2020 return: 3%.
*Returns are through May 15, 2020.