Better Than a Mattress: 5 Safe Bonds Funds for a Volatile Market

Better Than a Mattress: 5 Safe Bonds Funds for a Volatile Market

Looking for a few safe bond funds to park your cash in, earn a bit of yield from and (most importantly) not lose your shirt on?

I’ve heard from several subscribers who are looking for a safe dividend port in these renewed storms. Well, there aren’t many, but I’ve got a few ideas for you here! We’ll discuss them in a minute. First, let’s talk about the sudden change in weather.

Early last week, the VIX—the measure of volatility that everyone knows (and few can explain!)—mysteriously started popping higher. This was a bit curious because the VIX and the S&P 500 had been mirroring each other. A sailing market was accompanied by an ever-lower VIX reading:

The Rising S&P 500 and Falling VIX

The right tail of that chart—a rising VIX with a rising S&P 500—was a tipoff that something was amiss. I pointed out to my Dividend Swing Trader subscribers last Thursday morning, before the markets opened, that it was probably short-term trouble. Within hours, my suspicions were confirmed. It was trouble!

VIX Whispered: “Look Out”

Aside from the market being overdue for a tumble, we also have sky high investor sentiment (everyone’s a bull) and rich valuations (stocks are expensive). The highflyers that had been pulling the market upwards were especially pricey and loved, so it’s no surprise to us contrarians that they were unceremoniously dumped last week.

So here we are, with many income investors (who smartly did not understand paying anything for a big tech stock) sitting on some cash. Heck, you may be sitting on your cash and your hands!

Volatile markets do tend to reward patience. Daily whipsaws can upset rookies, but they are great for us calculated, methodical buyers who have an opportunity to “dollar cost average” our purchases. After all, we are able to bank more dividend per dollar on dips.

The key from getting here to there is keeping our capital intact. Stuffing cash under your mattress is one approach. But for those of you looking for a bit more yield (and perhaps comfort), consider these five safe bond funds.

I picked them in collaboration with my computer. These are five funds that:

  1. Yield 2% or more,
  2. Hold diversified portfolios of safe bonds, and, most importantly right now…
  3. Rarely blink when the market tanks.

Let’s start with the iShares Core US Aggregate Bond ETF (AGG), the bellwether ETF of fixed income. AGG is the easiest way to buy a basket of the bond types that Federal Reserve Chair Jay Powell is actively buying with his newly printed money.

AGG yields 2.3% (on a trailing basis) as I write. That’s a respectable start for an ETF, but/and it also has two catalysts for price appreciation.

First, the Fed’s bond buying program supports these bond prices (and keeps their yields low). Plus, as stocks drop, more money flows into fixed income. This means bond yields will drop (especially on investment grade offerings) and bond prices will rise.

I don’t recommend ETFs too often for buy and hold investors because it’s difficult to find value in the ETF space. But they are sturdier ports in market storms than my beloved closed-end funds (CEFs), which have more yield, more upside, but wider swings than ETFs.

(Long-term investors should embrace the volatility and choose the best CEFs rather than ETFs. But we’re talking short-term safety here! So, ETFs it is.)

The Vanguard Intermediate-Term Bond ETF (BIV) holds US government debt and similar types of high-quality fixed income. It’s a big, liquid fund that yields 2.4%, like AGG, and gradually grinds higher over time. In fact, it’s actually beaten AGG over the last ten years:

Two Bond ETFs That Like Falling Rates

Now, AGG and BIV have benefited from a decade of falling interest rates (which has pushed the prices of their bonds higher). But there is limited “juice” left on the falling rate bet, as the Fed is doing everything it can to avoid negative rates here in the US.

So, the next decade for AGG and BIV could be more challenging. But we’re not talking about buying these funds for a decade—we’re just after a safe fling. And these are the types of fixed income ETFs we can shack up with for a few months and feel safe with (antibody test notwithstanding!).

A Wild Week No Problem for These Bond Funds

Finally, we can “ride with the Fed” directly and purchase a couple of corporate bond ETFs. Powell & Co. are literally buying some of the “junkier” funds in the space like the iShares High Yield Corporate Bond ETF (HYG).

I’m not as interested in following our Fed Chair into the gutter. HYG sank last Thursday, and we’re talking yield “battleships” only in this column. Here are three corporate fixed income offerings that qualify (and rarely budge when markets break):

With stocks perhaps crashing again, these 2%+ payers at least won’t slaughter you like the highflying tech stocks that are slamming back down to Earth. But, as a contrarian, I prefer to play offense while the investing herd is talking defense.

These are the times when the big money is made. And right now, I’m looking at seven overlooked dividend investments that will:

  • Recession-proof any portfolio,
  • Pay generous yields to own them today, and
  • Provide consistent gains for years to come…

…no matter how far the markets crash from here. I call these “Hidden Yields” stocks, and they’re the best way to safely double your money by owning secure dividend-paying stocks. Interested in specifics? Click here to read about my recession-proof picks now.