With speculation building around future potential interest rate cuts, prioritizing fixed income ETFs may be a smart move.
Diversification into high-risk assets is one thing. But different asset classes aren’t guaranteed to perform in a particular way once interest rate cuts take place. Indeed, these cuts can materialize for a number of reasons. And investors will certainly not want to hear about the negatives typically associated with such moves.
If some sort of economic turmoil is leading the Federal Reserve to cut interest rates, fixed income investments such as bonds and bond-like equities could outperform. Let’s examine three top picks for investors seeking stability and passive income through whatever storm may be ahead.
Schwab U.S. Dividend Equity ETF (SCHD)
The Schwab U.S. Dividend Equity ETF (NYSEARCA:SCHD) is a top choice for investors searching for diversified exposure to dividend-paying stocks.
Offering a 3.5% yield, this fund features high-quality dividend payers. Diversified index funds like this provide stability, mitigating individual risks while offering access to various sectors for potential long-term gains. SCHD’s portfolio boasts notable companies across industries, indicating strong potential for capital appreciation.
Since its 2011 inception, the SCHD ETF has aimed to mirror the Dow Jones U.S. Dividend 100 Index. Over this time frame, this fund has achieved a 357% total return, with an average annual increase of 13% in its dividends. Despite a 3.8% dividend growth in the lowest year, this ETF has seen a nearly 12% average annual increase over 13 years.
With $54.2 billion in assets and an expense ratio of just 0.06%, SCHD remains a consistent performer. It’s one worth considering for investors looking for bond-like exposure from the equity markets.
Vanguard Utilities Index Fund ETF (VPU)
We all need to heat our homes and turn the lights on. That’s a reality. And it’s this reality that allows for regulated utilities to continue to raise prices consistently over time, generating cash flows which are very similar in many respects to bonds, as they (theoretically) reinvest into the grid.
The Vanguard Utilities Index Fund ETF (NYSEARCA:VPU) is among the top ETFs in this space, with nearly $5 billion in assets. As far as the utilities sector is concerned, that’s large, and it’s my preferable way to play the utilities space. That’s mostly because of its diversification across a number of niches, and its very low expense ratio of only 0.1%.
The fund provides investors with a relatively modest 3.4% dividend yield, but also strong capital appreciation upside potential. Utilities stocks have performed almost as well as the entire tech sector over the past two decades (which is hard to believe when you think about how well many tech names have performed). Sometimes, boring is good. And these utilities companies are simply cash flow machines that produce consistent income that make boring become profitable.
For those looking for exposure to this sector, the VPU ETF is the way to play this space.
Total Bond Market ETF Vanguard (BND)
Or, instead of creating passive incomes streams via investing in bond proxies, investors can buy bonds themselves in the ETF world. My preferable way to do so is via the Vanguard Total Bond Market ETF (NYSEARCA:BND).
Many bond ETFs stipulate duration as part of their strategy. There are short-, medium- and long-term bond funds that invest in bonds in one specific area of the curve. The thing is, if interest rates drop, bonds across the curve will likely come down. This ETF provides more diversified exposure to this trend. And it’s my preferred option for investors seeking true fixed income exposure.
While U.S bonds offer minimal risks among reactive to other sectors, there are certainly risks involved with buying such an ETF. Inflation could remain high, and interest rates could stay stubbornly elevated. If this is the case, there could be more downside ahead, while stocks continue higher.
But for those looking to create more of a 60/40 portfolio in this environment, this ETF is a great option. With an absolutely rock-bottom management fee of only 0.03%, this fund offers diversification that’s practically free. This is among the best choices out there for passive income investors looking for stability in these uncertain times.
On the date of publication, Chris MacDonald 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.
