Worried About Seasonal Volatility Increases, Consider These 2 Bond ETFs

 | Oct 11, 2021 10:53

Blustery fall weather usually corresponds with seasonal choppiness in stocks, and so far 2021 is proving to be no exception. When volatility in equity markets goes up, bonds as well as bond exchange-traded funds (ETFs) get increased attention.

A bond ETF might hold different fixed-income securities, such as Treasuries, sovereign bonds, municipal bonds, corporate bonds, or high-yield “junk” bonds. There are also ETFs that bring together different asset classes, including bonds, equities, real estate investment trust (REITs), and commodities.

Currently, the US 10-year Treasury yield—which moves inversely to prices—is sitting above 1.6%. In mid-August, it was shy of 1.2%. Rising yields typically unsettle Wall Street.

When yields increase fast, investors reevaluate how they allocate their capital among different asset classes. For instance, some might wonder if they might have become complacent with their stock positions.

Market participants are now closely watching increasing inflation levels, the possibility that the Federal Reserve might reduce its monthly bond purchases, and lately also concerns over the federal debt ceiling. And a number of investors are likely wondering where they could possible “park their cash.”

Meanwhile, analysts are debating what could be next for yields. Those investors who believe an increase toward the 1.75% or even 2.0% level in the coming quarters would need to pay attention to the duration of a bond (or bond ETF).

Duration suggests how much the price a bond will change when interest rates move. For instance, if a bond ETF has a duration of three years, its price would decline by about 3% if interest rates increase by one percentage point. Put another way, the higher the duration, the greater the sensitivity of the value of a bond portfolio to changes in interest rates.

Regular readers of this column know that we cover bond funds regularly (for example, discussed here, here, here, here, here, here and here). With that information, here are two more ETFs that could act as store of value in the weeks ahead.

h2 1. iShares 1-3 Year Treasury Bond ETF/h2
  • Current Price: $86.06
  • 52-Week Range: $86.05 - $86.46
  • Yield To Maturity: 0.32%
  • Expense Ratio: 0.15% per year

The iShares 1-3 Year Treasury Bond ETF (NASDAQ:SHY) invests in short-term US Treasury bonds whose maturities range from one to three years. In other words, investors do not need to worry about credit risk. Since its inception in July 2002, net assets have reached $20.25 billion.