Global stock market volatility, oil price collapse and economic slowdown in China continue to rattle investor confidence this year. Former high flying stocks have come back to earth in the past few weeks as investors worry about the impact of weak global demand on corporate earnings. Investors had poured a lot of money into these stocks despite their sky high valuations but “risk-off” sentiment is sending many to “safer” assets now.
As the domestic economy continued to recover slowly but steadily over the past few years, US stocks remained one of the best asset classes in the world. But of late, domestic economic growth has been rather uneven. In the current uncertain market environment, it would be better for investors to focus on capital preservation. Below we have discussed some ETFs that will not only provide stability and diversification to your portfolio but also help in capital preservation. (See: Alternative ETFs to Fight the Slump)
Long-Term Treasury Bonds
The Federal Reserve spent the last year prepping the markets for a rate hike for the first time in almost a decade and ultimately raised rates by 25 bps in December and also penciled in four rate hikes this year. The market however expects not more than one rate increase this year. So, bond markets continue to frustrate bears again. (Read: How to Celebrate Chinese New Year with ETFs)
Longer-term bonds are impacted more by inflationary expectations than by monetary actions and with expectations so muted, the bullish trend for these ETFs is likely to continue. Then while rates are low here in the US, they are much lower in the other parts of the developed world. In Europe and Japan, monetary authorities are expected to continue easing in order to fight deflationary risks. So, compared with those interest rates, US interest rates are still very attractive for foreign investors.
25+ Year Zero Coupon u.s. Treasury Index Fund (ZROZ)
ZROZ follows the BofA Merrill Lynch Long US Treasury Principal STRIPS Index, which focuses on Treasury principal STRIPS that have 25 years or more remaining to final maturity. It charges just 15 basis points in expenses while the 30-day SEC yield is 2.53% currently.
iShares 20+ Year Treasury Bond ETF (TLT – ETF report)
TLT tracks the Barclays Capital U.S. 20+ Year Treasury Bond Index. It is the most popular and liquid ETF in the space with AUM of over $9.4 billion and excellent daily trading volumes. The fund charges 15 bps in expense ratio while the 30-day SEC yield is 2.34% currently.
Both these ETFs have Zacks ETF Rank #2 (Buy).
