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In times of market trouble, investors look for ways to limit their exposure to stocks while not foregoing returns entirely. While one could choose plain cash, the real rate of cash is negative; with inflation chipping away at value, a cash holding actually declines in value over time. Far better than choosing cash in these situations may be exchange-traded funds (ETFs), which are designed to be stable providers of moderate returns. Selecting one or more of these funds allows investors to cut market exposure while still enjoying reasonable returns.

It's important to note that, although the ETFs below are generally designed to be stable, no investment is entirely secure. Fortunately, though, with solid sponsors and liquidity as well as large portfolios, these ETFs are among the most stable and safe avenues that an investor has when it comes time to flee market volatility.

Key Takeaways

  • When the stock market becomes volatile, some investors may seek the relative safety of bonds.
  • In particular, short-term and variable-rate corporate bonds and U.S. Treasuries tend to provide the greatest cushion in a bear market.
  • Here, we look at some bond ETFs that can provide you with those kinds of exposures to help weather choppy markets.

iShares 1-3 Treasury Bond ETF (SHY)

The iShares 1-3 Treasury Bond ETF is an excellent choice for cautious investors. With about $19.3 billion of U.S. Treasury notes and bonds as of 2021, maturing between one and three years, this ETF enjoys exceptional liquidity. BlackRock, Inc.'s (BLKiShares line is one of the best-established and strongest ETF providers in business.

For investors concerned about interest rates, it's worth noting that SHY's value declines as interest rates rise. This is a result of the fact that all of its holdings are fixed-rate instruments. On the other hand, SHY's assets are all backed by the full faith and credit of the U.S. government.

iShares Short-Term Corporate Bond ETF (IGSB)

Like SHY, the iShares Short-Term Corporate Bond ETF is also founded in fixed-rate instruments with maturities between one and three years. While SHY focuses on U.S. Treasuries, though, IGSB is made up primarily of corporate securities. This means that, while its value also declines when rates go up, like SHY, it tends to hold assets that pay higher rates.

IGSB was formerly the iShares 1-3 Year Credit Bond ETF (CSJ), which focused on bonds with maturities up to three years. Now, the fund tracks the ICE BofAML 1-5 Year US Corporate Index, which allows bonds with maturities of up to five years.

iShares Floating Rate Bond ETF (FLOT)

A third iShares ETF, the Floating Rate Bond ETF (FLOT), joins SHY and IGSB on the list of stable products. With $6.5 billion in floating-rate securities, primarily issued by corporations and with an average maturity of roughly 1.4 years as of 2021, FLOT usually sees its value increase along with rates. It also enjoys high liquidity.

SPDR Portfolio Short Term Corporate Bond ETF (SPSB)

State Street's SPDR Portfolio Short Term Corporate Bond ETF (SPSB) holds corporate bonds maturing between one and three years, like CSJ. Without government-guaranteed bonds in its $7.77 billion basket, though, SPSB generally enjoys higher returns than its rival as of 2021. The flip side of this is that SPSB is also somewhat more volatile than the other ETFs on this list.

Special Considerations

One approach for investors looking to guard against choppy equity markets is by investing in a portfolio of such ETFs. For instance, Forbes found that a mix of 65% FLOT, 10% SHY, 15% CSJ, and 10% SPSB brought about the best combination of volatility, high returns, and low drawdowns for a period of roughly seven years through 2018. While these particular ETFs in these weights may not apply for every situation or for every time period, the idea of diversification applies to this strategy as well.

It's also important for investors to be aware that ETFs can, at times, face liquidity crunches as well. If corporate bonds spreads are thrown off due to extreme market shifts, any of these ETFs focusing on that area could experience trouble.