It has been a very odd year for investors. Ironically, it doesn’t matter what one is invested in, as almost all asset classes have been on the move. Bonds, currencies, equities, cryptocurrencies — it doesn’t matter! That has us wondering what are the best assets, and thus the best ETFs, to buy for 2023.
The stock market has been decimated, with the S&P 500 suffering a peak-to-trough decline of 24.5%. Bonds have had one of their worst years on record, with the 10-year Treasury logging its worst decline (down 13%) since 1900. Previously, the worst one-year decline for the 10-year was an 8% loss in 1994.
So, what are we going to do about some of these dreadful performances?
The good news is, markets generally favor the upside. A recent study showed that over the last 80 years, the S&P 500 has produced a gain about 80% of the time. Whether that’s over the last 20, 30, 40, 50 or 80 years, that observation remains true.
Accordingly, let’s look for the best ETFs to play for a rebound next year.
|VTI||Vanguard Total Stock Market Index Fund ETF||$199.90|
|TLT||iShares 20 Plus Year Treasury Bond ETF||$108.16|
|LQD||iShares iBoxx Investment Grade Corporate Bond ETF||$109.77|
Vanguard Total Stock Market Index Fund ETF (VTI)
The 60/40 portfolio — which has 60% of its funds allocated to stocks and 40% to bonds — has become extremely popular in finance. It’s become a popular way for investors to still have exposure to equities, while also gaining stability from bonds.
However, this year bonds have been very unstable. As a result, the 60/40 portfolio has had one of its worst years on record. Since 1900, the worst 10 years for the portfolio have returns ranging from down 8% to down 31%.
Of those years, just one year — 1931 — generated a loss in the following year, when it fell another 31% after falling 14% in the year before. Keep in mind, this was during the great depression. For the other nine years, the following year generated a double-digit return all but once — rallying just 5% in 1932 — while generating an average and a median return of 13% and 17%, respectively.
With the 60/40 portfolio currently down 13% year to date, odds favor a rebound in 2023.
This portfolio style is more popular within the mutual fund picks, but for investors who want a simple way to play this using the best ETFs out there, they could simply allocate 60% of their desired funds to the Vanguard Total Stock Market Index Fund ETF (NYSEARCA:VTI), and allocate the other 40% to the Vanguard Total Bond Market Index Fund ETF (NYSEARCA:BND) or the iShares Core US Aggregate Bond ETF (NYSEARCA:AGG).
iShares 20 Plus Year Treasury Bond ETF (TLT)
Earlier, I mentioned that the 10-year Treasury bond is set for its worst annual performance since 1900. This has been a bad year but…that bad?
Given the rapid rise of interest rates and the immense fluctuations in the US dollar, it’s no surprise that bonds haven’t been the typical safe-haven asset that investors have become accustomed too.
Investors seeking less volatility can look for different and more specific Treasury bond ETFs. However, the most popular, liquid and heavily-traded one is the iShares 20 Plus Year Treasury Bond ETF (NASDAQ:TLT).
The TLT is down “just” 27.5%, which would still make for its worst one-year performance ever. At this year’s low though, the TLT was down just over 38%.
Investors who do not feel comfortable with the TLT can always opt for a shorter-term ETF (like 7-10 year Treasuries). However, it seems like longer-dated Treasury bonds are set for a rebound next year. Thus, this exchange trade fund makes this list of best ETFs for long-term investors seeking an excellent entry point to a traditionally stable investment category.
iShares iBoxx Investment Grade Corporate Bond ETF (LQD)
The only year that’s been worse than 2022 for the iShares iBoxx Investment Grade Corporate Bond ETF (NYSEARCA:LQD) was 2008. But that’s only when we’re talking about peak-to-trough declines.
In 2008, the LQD ETF fell 27.5% at the year-to-date low vs. a fall of 25.75% in 2022. However, the ETF ended the year down just 3% in 2008. So far, shares are still down more than 17% for 2022. Also, let’s keep in mind just how bad 2008 was for the global economy.
Performance aside, the LQD is just another alternative to playing a rebound in bonds for 2023. While I do prefer Treasury bonds, corporate bonds can have their place in investor portfolios as well. The driving catalysts here are two-fold.
First, the Fed has been on a rate-hiking spree all year long, which is set to taper off quite a bit in 2023. Admittedly, that’s just a forecast and that can certainly change. But as it stands, the Fed is closer to the end of its rate-hiking cycle than the beginning.
Second, fears of a global recession are both palpable and realistic. Should a recession arrive, it’s going to force investors into safe-haven assets like bonds. While Treasuries are the safest of the safe, investment grade debt may also become attractive to investors.
On the date of publication, Bret Kenwell did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.