With the markets swinging in all directions, the selections have been slim for investors looking for the best ETFs and mutual funds. Cash is also not a solution, as inflation continues to erode capital.
So what to do?
For Kevin Kautzmann, founder and director of EBNY Financial, we are clearly in a bear market. As inflation eats away at people’s wallets, preserving capital is essential for most investors. And for that, the best ETFs could be conservative or plain vanilla funds.
“It’s been a very difficult year,” Kautzmann said. “It’s been very difficult to get people into stuff – you don’t want to throw good money after bad.”
EBNY, based in New York, is a family-owned independent fee-based financial advisory firm with over $160 million in assets under management. He has served small and medium-sized businesses, charter schools, non-profit organizations, 401(k) plans, pension funds and high net worth individuals since 1998.
Kautzmann, who has worked in the financial management field for 25 years, thinks we could live through a whole year of high inflation. With the yield curve inverted, which is usually a sign of an impending recession, short-term rates are higher than longer-term ones.
“There’s a bond anomaly that I think my clients need to take advantage of and it’s in the
inverted yield curve,” he explained. “It’s been posted a few times, but now when you’re talking about 1-2 year treasuries paying (about) 4% – it’s really phenomenal – whereas the 10 year treasury is much less. “
Best ETFs: Time to look at bond funds
IShares 1-3 Year Treasury Bond ETF (SHY) invests in US Treasury bonds with maturities between one and three years. The $27 billion fund captures some of the highest yields in the current US Treasury market.
It offers a handsome SEC yield of 3.6%, while charging a low annual management fee of 0.15%. However, it is down 4.52% since the start of the year.
“1-2 year Treasurys are the sweet spot right now for yield, so SHY can work very well in that.
environment,” Kautzmann said. “I also like that it has monthly income for retirees and low-duration treasury bills to deal with upcoming changes in interest rates.”
Within equities, “there’s not really much going on. The only thing that works is the value of large caps at this point.” However, he noted that interest rates will also affect large cap earnings, so this is not a risk-free area.
Dividends are the sweet spot
“I’ve been doing this for 25 years and I’ve been through several stock market crashes now, and what I always see is that it’s the dividends that hold the ship back,” Kautzmann said. “And if you get good dividends – cash dividends, not leveraged dividends – these are the companies that (could) go down, but have a floor for them.”
As such, his second choice is iShares Core Dividend Growth ETF (DGRO). The $22 billion fund invests in companies that are increasing their dividends.
The fund earns 2.3% and charges a low annual fee of just 0.08%. The fund is down 16% this year, however.
Its main holdings include Microsoft (MSFT), Apple (AAPL), Johnson & Johnson (JNJ), JPMorgan Chase (JPM) and Pfizer (EFP).
Coming back to bond markets, Kautzmann likes iShares Short Maturity Bond (NEAR). The $4.4 billion fund invests in short-dated corporate bonds, which meets the short-duration objective of investing in bonds.
The fund’s SEC yield is 3.3% and it charges an annual fee of 0.25%. The ETF focuses on quality, with an overweight in A-rated bonds relative to its peers. Top corporate bond holdings include Bank of America (BAC), Morgan Stanley (MRS), AbbVie (ABBV), JPMorgan Chase (JPM), Volkswagen Group of America Finance, humane (HUM), Citibank Credit Card Issuance Trust and 7-Eleven. The fund is down just 0.62% so far this year.
Kautzmann says he has a set of criteria that he applies to his top investment picks. These include good market capitalization, low fees, no leverage and no derivatives.
“That’s why I like some of these vanilla dishes,” he said. “And for now, you need to stay short-term in bond funds and ETFs. For the level of risk versus return, treasuries are a no-brainer.”
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