The tapering and potential ending of the Fed’s quantitative easing programs is sending shockwaves throughout the fixed-income world. That’s because rising interest rates have a negative correlation with bond prices. But it doesn’t mean you shouldn’t consider a bond ETF.
The basic issue at hand is that as the Fed raises rates, a portfolio of fixed-income securities will likely lose value. And the longer the maturity of the bond, the bigger that loss will be. Essentially, for every percentage-point gain in yield, a 10-year bond will lose roughly 10% in price … and a 30-year bond will drop around 30%.
Those are some pretty hefty losses … especially considering nearly $33 billion of investors’ money is located in the broad Vanguard Total Bond Market ETF (BND) and iShares Core Total Aggregate U.S. Bond ETF (AGG). But with the need for income still there, bond investors are facing a quandary.
That is, unless they expand their horizons. The general ETF boom has now made some pretty “weird” and esoteric bond types available to the masses. And a few of these bond ETFs — while often ignored — could be the best way to get your income fix and navigate the Fed’s taper tantrum.
Here’s four of the best “weird” bond ETF investments to consider.