As another debt ceiling debate looms in 2014 and Congress seem incapable of finding a solution, Treasuries don’t have the same appeal they once had.
Today’s fixed income environment seems to be turned on its head. It used to be that U.S. Treasuries were thought of as one of the safest possible allocations one could make, and whether or not this is still the case the public perception has certainly shifted. After watching Congress bump up against defaults on more than one occasion, it seems that the confidence that once boosted U.S. debts is beginning to erode.
With yet another debt ceiling debate coming in 2014 and no sign of Congress cooperating to find a real solution, Treasuries simply do not have the same appeal they once had. At the same time, investors do not want to leave their “rainy day” funds sitting in cash, earning nothing. Below, we offer five intriguing alternatives to U.S. Treasuries:
1. Pimco Total Return ETF (BOND)
For those who still want some exposure to Treasuries, Pimco‘s BOND is a great option. The fund is managed by legendary bond investor Bill Gross and remains fully transparent—investors can find BOND’s exposure at any time by simply visiting its page on Pimco’s website. As an active product with a solid manager, BOND can still cover a bit of a Treasury allocation for those who want it, but it will also be able to quickly shift or exit a position if things head south on Capitol Hill.
The fund has amassed more than $3.8 billion in assets in just over 18 months and charges just 0.55%, a relatively cheap expense for a product featuring active management.
2. iShares iBoxx $ Investment Grade Corporate Bond ETF (LQD)
Staying in the fixed income space, investors having trouble trusting Treasuries may want to turn their attention to corporate debt. While it is not necessarily the safest bet on the market, it is very unlikely that a number of these bellwethers would ever default on their notes with names like Goldman Sachs, AT&T, JP Morgan and GE among other names in this portfolio. Better yet, corporate debt will offer a much more attractive coupon, as this fund pays out nearly 3.5% per year.
3. SPDR S&P Dividend ETF (SDY)
Some investors are wary of the fixed income in general, especially after witnessing the current bull run that equities are enjoying. SDY presents itself as one of the safest and strongest alternatives for investors who do not mind the added risk that equities tend to carry. The fund invests in the 50 highest yielding securities in the S&P Dividend Aristocrats Index, an exclusive list that contains only firms that have increased their dividends for 25 or more consecutive years [see also Dividend ETF Special: 25 Equity ETFs With Attractive Distribution Yields].
Remember, SDY is not about having a high, flashy yield (currently at 2.45%), but about a stable dividend based on some of the most consistent payers in the world. Those looking for a high yield/higher risk option would be better served elsewhere.
4. iShares J.P. Morgan USD Emerging Markets Bond ETF (EMB)
Certainly the riskiest fund on this list, EMB offers a broad range of debts tied to emerging markets. This allocation would be for investors who simply do not trust the U.S. and its ability to pay off its debts. With the national debt just breaking through the $17 trillion mark, it would be hard to blame these investors. While emerging markets do carry an aura of risk, some investors feel more comfortable with their funds overseas than at home.
The fund is currently yielding 4.2%, but it should be noted that just 60% of its holdings are investment grade. As such, this play is for those who can stomach a fair amount of risk. Investors should also note that its performance relative to its peers has been weak in 2013, but that may present a buying opportunity for those interested.
5. iShares Floating Rate Bond ETF (FLOT)
For those who have a longer time horizon, rates are a big point of concern. With rates at all-time lows, many fear that their inevitable rise could send bonds into a bear market. However, a floating rate product has far less interest rate sensitivity than its peers, making it an ideal choice in an environment with tumultuous rates.
FLOT will make for a good alternative to long-term Treasuries that have the potential to be heavily suppressed if and when rates eventually rise. The fund charges just 20 basis points and has more than $3.7 billion in assets. One thing to note—and it may be a deal breaker for investors who remain wary of the financial space—is that FLOT invests more than 50% of its assets in financials.
Jared Cummans writes for ETFdb, which offers a comprehensive and original ETF database and analytical consulting services for advisors and investors, as well as a free newsletter. Learn more about their services by visiting ETFdb.com. Disclosure: the author had no positions in the securities named in this article at the time of writing.