Bond ETFs Can Add Stability In Wild Times

The Federal Reserve cut the key interest rate last week to 1%, and while it affects stocks, it also can have an impact on bond exchange traded funds (ETFs).

Ron DeLegge for ETF Guide reports that lower rates also translate into lower yields for bond investors. Conversely, while bond investors have seen their yields fall, this has been offset by higher bond prices.

Lower interest rates should make borrowing money easier for businesses and consumers so that business activity will resume and begin to heal the economy.

Bond ETFs can be a way to incorporate bonds into any portfolio and they will help to stabilize any investment strategy, as they tend to do well when other asset classes such as stocks, real estate and commodities are down.

Deflation in some areas is a big concern right now, and the Federal Reserve hopes to counteract this through these rate cuts. Owning inflation-protected Treasuries (or TIPS) is one simple way to guard against the threat of inflation.

SPDR Barclays Capital TIPS (IPE) can give exposure. It’s down 7.1% year-to-date.

The fund that gives the broadest exposure to bonds is the Vanguard Total Bond Market (BND), which is down 2.2% year-to-date. Its underlying index is the broadest measure of the investment-grade taxable U.S. bond market.

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