6 Infrastructure ETFs to Watch in 2022

Infrastructure ETFs offer investors a diversified approach to this lucrative sector. Moreover, the infrastructure industry sits at the brink of global disruption. Investors can get in on companies making the changes that are shifting capital availability, changing environmental priorities and rapid urbanization. Moreover, this presents a unique opportunity for investors to get in early on disruptions in this sector.

List of 6 Infrastructure ETFs

  • Global X U.S. Infrastructure Development ETF (BATS: PAVE)
  • iShares Global Infrastructure ETF (Nasdaq: IGF)
  • FlexShares STOXX Global Broad Infrastructure Index Fund (NYSE: NFRA)
  • iShares U.S. Infrastructure ETF (BATS: IFRA)
  • SPDR S&P Global Infrastructure ETF (NYSE: SSGA)
  • Alerian Energy Infrastructure ETF (NYSE: ENFR)

Below, I’ll go over the highlights for these infrastructure funds below. This includes a description of each fund, the fund’s top holdings and investor returns.

Infrastructure ETFs

Infrastructure ETFs to Buy in 2022

Global X U.S. Infrastructure Development ETF

Expense Ratio: 0.47%

Holdings: 98

The Global X US Infrastructure Development ETF offers exposure to domestic infrastructure development. The list includes companies with a focus on construction and engineering, raw materials, composites and transportation companies. It also includes companies with a heavy focus on construction equipment production and distribution. It seeks to track the S&P Global Infrastructure Index.

PAVE manages assets worth around $4 billion, making it the largest dedicated infrastructure ETF on Wall Street. Among its holdings are stocks that are publicly traded in the construction materials, heavy equipment, engineering and construction sectors.

The portfolio has a broad scope despite a targeted approach. Global X U.S. Infrastructure Development ETF has about 98 total positions. Some of the company’s top holdings include Nucor, Sempra Energy, Deere & Co., Fastenal and CSX. Moreover, this fund is highly diversified with no assets representing more than around 4% per holding.

Similar to the performance of the rest of Wall Street, the fund has lost about 20% this year so far.

iShares Global Infrastructure ETF

Expense Ratio: 0.43%

Holdings: 75 

The iShares Global Infrastructure ETF offers exposure to companies that provide transportation, communication, water and electricity services. It also seeks to track the S&P Global Infrastructure Index.

The index tracks the performance of the stocks of large infrastructure companies around the world. It contains companies in developed markets around the world. So, you should keep in mind that this fund is not exclusive to U.S.-based stocks. However, nearly 40% of this ETF contains U.S.-based companies. Moreover, some of the international companies in this ETF do business in the states. If you’re looking to invest in a domestic infrastructure ETF, check out the iShares U.S. Infrastructure ETF in the list below.

This fund currently has more than $3 billion in total assets. Its top holdings include Atlantia, Transurban, Enbridge, Aena and NextEra Energy. This fund is highly diversified, similar to the infrastructure ETF above. Its top holding carries 5% of the fund.

This infrastructure ETF is faring well despite ongoing market volatility. The fund is down around 3% so far in 2022.

FlexShares STOXX Global Broad Infrastructure Index Fund

Expense Ratio: 0.48%

Holdings: 220

FlexShares STOXX Global Broad Infrastructure Index Fund seeks to track STOXX Global Broad Infrastructure Index. The index reflects the performance of public infrastructure companies in the developed and emerging markets. It targets loosely-defined infrastructure sectors including energy, communications, utilities, transportation and government outsourcing.

This fund has around $2 billion in total assets. However, this fund is the largest infrastructure ETF in terms of holdings. The fund currently has around 220 holdings. Its top holdings consist of the Canadian National Railway, Canadian Pacific Railway, Verizon, Comcast and Enbridge. Similar to the ETFs above, this fund is highly diversified. Its top holding accounts for 5% of the entire fund.

This fund is in the red so far in 2022 with it being down 12%. However, it’s performing relatively well compared to the rest of the market. The fund’s stability is largely due to this fund’s diversification.

iShares U.S. Infrastructure ETF

Expense Ratio: 0.30%

Holdings: 163

The iShares U.S. Infrastructure ETF tracks the NYSE FactSet U.S. Infrastructure Index. It offers exposure to two groups of infrastructure companies: owners and operators, such as railroads and utilities, and enablers, such as materials and construction companies. So, investing in this fund can provide investors with access to infrastructure companies that may benefit from increased infrastructure activity in the United States.

This infrastructure ETF is smaller than the rest with assets reported around $1 billion. Despite this, this fund is one of the most diversified on this list. It has over 160 holdings in total. Furthermore, each stock in this fund accounts for less than about 1% of the portfolio. So, the wide diversification helps combat market volatility.

This infrastructure ETF is down nearly 13% in 2022. However, this fund is promising long-term with returns of nearly 30% in the last five years. So, this fund should pick up when the market cools down a bit.

SPDR S&P Global Infrastructure ETF

Expense Ratio: 0.40%

Holdings: 75

The SPDR S&P Global Infrastructure ETF seeks to track the performance of the S&P Global Infrastructure Index. The index comprises 75 of the largest publicly listed infrastructure companies.

The index has exposure to companies across transportation, utility and energy infrastructure sub-industries. Approximately 42% of its portfolio consists of industrials and 39% focuses on utilities. The remaining 20% consists of energy stocks.

This infrastructure fund’s top holdings include Atlantia, Transurban, Enbridge, Aena and NextEra Energy. Moreover, this fund is similar to the others with its diversification. The top holding in this fund carries around 5% weight in the fund.

This fund is holding up well with ongoing market volatility with -3% returns in 2022. So, this is one of the promising infrastructure ETFs as the market goes back to normal.

Alerian Energy Infrastructure ETF

Expense Ratio: 0.35%

Holdings: 33

The Alerian Energy Infrastructure ETF targets the Alerian Midstream Energy Select Index. This index includes companies operating in the midstream energy infrastructure sector in North America. It includes corporations and master limited partnerships (MLPs) dealing with pipeline transportation, rail and energy storage and processing.

Approximately 90% of the fund’s holdings are in companies involved in the gathering, processing and transportation of natural gas and petroleum. Its top holdings include Enbridge, Enterprise Products Partners, TC Energy, Energy Transfer and Cheniere Energy. This fund is less diversified than the others on this list with its top three holdings representing over 25% of the fund.

This ETF is in the green so far in 2022 with returns over 6% year-to-date. Moreover, with the rest of the market generally in the red, this presents a huge opportunity for investors looking to get in on diversified infrastructure stocks.

The Final Line on Infrastructure ETFs

Infrastructure ETFs offer investors a diversified, lower-risk approach to investing in this sector. Moreover, investing in disruptors of the industry can produce big returns for investors.

However, make sure to do your research before investing. Returns on investments are never guaranteed and there are always risks with investing. However, this is where doing a deep dive on a fund can make all the difference.

For other infrastructure investment opportunities, check out these infrastructure stocks. There are lots investment opportunities to consider today…

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Investing in Metaverse ETFs: Exploring the Future of Digital ROI

One of the biggest buzzwords sprawling the digital landscape in 2022 is “metaverse.” Coined by Meta Platforms (Nasdaq: FB), it’s a concept that marks the next iteration of the digital revolution. The potential to live, work and play online. As you might imagine, the metaverse is a lucrative investment opportunity just waiting to happen. It’s why many investors have begun to ask if there are any metaverse ETFs out there.

Not only are there metaverse ETFs out there, these funds are well-poised to capitalize on long-term digital trends. Here’s a closer look at the landscape of metaverse ETFs. As well as why these funds are smart investments for tech investors looking to ride the metaverse wave to higher heights.

The best metaverse ETFs for 2022.

Metaverse ETFs: What is the Metaverse?

In simplest terms, the metaverse is virtual reality. In a literal sense, it’s a collection of digital networks designed to make living, working and playing possible in a fully virtual capacity. Imagine logging online and using a virtual reality headset to look around a full rendered 3D environment where anything is possible.

It sounds like something out of the hit novel (and film) Ready Player One. However, the metaverse is quickly becoming a reality. Leading the charge into this new, digital frontier is Meta Platforms (formerly Facebook). Meta has already pioneered simple metaverse applications. For instance, virtual meeting rooms with avatars and VR games that immerse the user in an explorable virtual world. While exciting, these applications are only the beginning of what the metaverse will eventually become.

Meta isn’t the only company buying into the metaverse as an evolution of the internet. Numerous companies are preparing for a wave of virtual reality tech. It’s why investors are turning to metaverse ETFs as they seek to understand the direction of this technology. As well as the companies contributing to it.

Different Metaverses are Coming to Fruition

When talking about the metaverse, it’s important to understand that there’s a difference between the concept of the metaverse and the different applications of that concept. Specifically, we’re likely to see many different versions of the metaverse that vary across industries and for different purposes. Some of the emerging case studies include:

  • An Industrial Metaverse, built on the Industrial Internet of Things (IIoT).
  • A Corporate Metaverse, designed with remote, decentralized work in mind.
  • An Entertainment Metaverse, where people come together to consume media.
  • The Asset Metaverse, which is already rising to prominence thanks to NFTs.

As the metaverse concept continues to take shape, so will viable applications. Whether for work or entertainment, or as a way to unlock the full potential of the digital era, the metaverse and metaverse ETFs are gaining momentum. And, with so many applications, there are even more opportunities to invest in the companies building the metaverse.

Who’s Building the Metaverse?

There are a handful of companies building the metaverse today. However, their ranks grow larger every day. Meta Platforms is pioneering everything from VR goggles to digital spaces. Snap Inc. is on the cutting edge of augmented reality that can bring your personal likeness to the metaverse. Qualcomm, NVIDIA and Unity are all putting effort into developing the hardware and software that will power the metaverse.

The companies building the metaverse are those dabbling in a few specific technologies. That includes augmented reality (AR), virtual reality (VR), extended reality (XR), mixed reality (MR), blockchain and more. As a secondary market, investors need to look at the hardware companies developing access technologies for the metaverse. This includes everything from phones and tablets to VR headsets and immersive gaming rigs.

Looking at Current Metaverse ETFs

Despite the novel nature of the emerging metaverse landscape, there are actually quite a few metaverse ETFs to choose from. Many funds are still evolving as the scope and breadth of the metaverse become apparent. If you’re an investor looking more closely at the metaverse and the potential ROI associated with it, some of the most relevant ETFs to explore include:

  1. Roundhill Ball Metaverse ETF (METV)
  2. Evolve Metaverse ETF (MESH)
  3. ProShares Metaverse ETF (VERS)
  4. Horizons Global Metaverse Index ETF (MTAV)
  5. Fount Metaverse ETF (MTVR)
  6. Subversive Metaverse ETF (PUNK)

These metaverse ETFs offer a great mix of variety when it comes to metaverse exposure. They not only focus on companies like Meta Platforms (Nasdaq: FB). They’re inclusive of companies that are powering the metaverse from a hardware, software, entertainment, business and practical standpoints.

Some of the common holdings among these metaverse ETFs include NVIDIA Corporation (Nasdaq: NVDA), Unity Software (NYSE: U) and Apple (Nasdaq: AAPL). As well as Microsoft (Nasdaq: MSFT), Alphabet Inc. (Nasdaq: GOOG), Snap Inc. (NYSE: SNAP) and others.

Should You Invest in the Metaverse?

The technology sector has many investors spooked right now, and for good reason: it’s one of the hardest hit by stock market downturn in 2022. However, that doesn’t mean the sector has stopped innovating. It’s not a question of if the metaverse is coming; it’s when. Investors willing to become early adopters in its infancy will find themselves reaping huge ROI down the line when the metaverse is fully operational.

If you’re interested in metaverse ETFs and the long-term potential it offers as an investment thesis, now’s the time to buy. And, if you want to learn more about thematic investing and long-term macro investment trends, we encourage you to discover our family of investment newsletters. You’ll get expert advice delivered straight to your inbox, relevant to some of the most exciting industry trends taking shape right now.

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How do Savings Bonds Work as Defensive Investments?

As retail investors diversify outside of an equities-only portfolio, many are looking at savings bonds as an opportunity to capitalize on rising interest rates. Historically, they are one of the oldest and most trusted investment products. They’re backed by the full faith and credit of the United States government, and they offer investors options to both preserve and grow their wealth. They’re widely considered a defensive investment and tend to rise in popularity as the stock market falls on hard times.

Let’s take a closer look at savings bonds: what they are, how they work as investment vehicles and how to best leverage them into a defensive portfolio. Plus, we’ll look at the role of savings bonds within the context of a recession.

Investing in savings bonds.

What is a Savings Bond?

A savings bond is a long-term depository investment made with the United States Treasury. They offer investors a guaranteed rate of return on their money, depending on how long they hold it. There are actually two types of savings bonds investors can consider:

  • Series EE. These bonds offer a fixed rate of return that will double the face value after a period of 20 years. They’re available in denominations ranging from $25 to $10,000, capped at $10,000 per year, per taxpayer. Investors need to hold these bonds for at least one year before selling, and there’s a penalty amounting to three months’ interest if sold within five years of purchase.
  • Series I. These bonds adjust their interest rate every six months based on inflation. Like Series EE bonds, investors can purchase Series I bonds in increments ranging from $25 to $10,000, capped at $10,000 per year, per taxpayer. A type of zero-coupon bond, investors gain the full bond payout when it’s cashed in. There’s a penalty amounting to three months’ interest if sold within five years of purchase.

Savings bonds are the ultimate “set it and forget it” investments because, unlike other ones that pay interest and fluctuate based on the bond market, these investments are best held for the long-term. It’s best to invest in them when your time horizon on realizing their gains is 20-30 years.

Series HH savings bonds were also available from 1980 through August 2004. These bonds had a maturity date of 20 years and functioned similar to Series EE bonds, though they paid interest bi-annually. Investors who still hold Series HH bonds can continue to collect interest on them or cash them in at face value.

Savings Bonds vs. Other Treasuries

Savings bonds are one type of U.S. Treasury product, alongside T-Bills, T-Notes, T-Bonds and Treasury Inflation-Protected Securities (TIPS). The key difference between savings bonds and other U.S. Treasuries is rate of maturity. T-Bills mature in less than 52 weeks. T-Notes mature in less than 10 years. T-Bonds mature in 20-30 years and pay interest, unlike savings bonds, which deliver ROI at the time of redemption.

It’s often simpler to think about savings bonds as deposits that earn interest, whereas other U.S. Treasuries are debt investment products. They work similarly to a savings account.

The Major Benefits

Given the option to put your money in savings bonds vs. a savings account (or even a debt investment), savings bonds offer some excellent benefits to consider. Some of the primary reasons you might invest include:

  • The earnings they generate are exempt from state income taxes
  • You can also avoid federal taxes if you use the earnings for education
  • There’s a low barrier to entry; they are available for as little as $25
  • Redeemable with no penalty after five years
  • Backed by the full faith and credit of the United States Government

Savings bonds offer interest-earning opportunities, combined with the flexibility to either let your money grow risk-free for 30 years or pull it out penalty-free after five years. They’re also very accessible to any investor.

Are Savings Bonds Good Investments?

Many investors wonder how good a savings bond is as a defensive investment. It’s a complex question because it really depends on the nature of the investor and their reason for investing.

For young investors, they aren’t the best option because of their low interest rates. Those with a long time horizon can afford to invest in much more lucrative vehicles. This even includes defensive investments like commodities or other types of bonds. Conversely, those nearing or in retirement will find they are a very convenient investment. They offer the stability and reliability of a U.S.-backed bond, with the ability to cash in bonds if the interest rate environment changes.

Ultimately, savings bonds are typically better as instruments for wealth preservation, not generation.

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How to Use Them in a Recession

If you’re looking to hedge your portfolio and take a more defensive stance against oncoming economic hardship, savings bonds can provide stability. That said, they’re better for those seeking very long-term defensive investments. Depending on the type of one you buy (Series EE vs. Series I), each has its own grouping of pros and cons. Nevertheless, either represents the safest possible investments you can make.

Looking for tips and other strategies to hedge your portfolio against economic hardship? Discover our family of investment newsletters and take advantage of the expert advice of seasoned investors who know how to navigate the market in any conditions, including economic recession.

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Top Gas ETFs to Buy in 2022 with Soaring Gas Prices

All anyone wants to talk about anymore is the soaring price of gasoline. After all, the cost to fill your tank has never been higher. With industry profits piling up, get your share with the best gas ETFs to buy before the second half (2H) of 2022.

First, the pandemic severely strained the industry as demand fell off from global lockdowns. As a result, over 100 oil and gas companies went out of business.

Then, as the economy reopened and demand started catching up, Russia’s invasion of Ukraine stoked a fire under an already strained market. So, demand is outpacing supply as nations look elsewhere to fill the supply gap left by Russia’s massive presence in the commodity market.

Nonetheless, gasoline is essential to keep the economy running smoothly. You need gas for fuel to get to work and back. Not to mention, businesses rely on gas for transporting goods, which influences prices. To grab your piece of the rising energy costs, below are the top gas ETFs to buy in 2H of 2022.

Top gas ETFs to buy in 2022.

What Are the Best Gas ETFs to Buy Right Now?

The top gas ETFs to buy are outperforming the market right now as soaring energy costs boost profits. For example, Natural Gas Futures (NG1) are up over 120% YTD and almost 200% over the past year.

Meanwhile, all major indexes are down significantly this year, with the Nasdaq 100 Index (NDX) slipping almost 30% YTD. On top of this, researchers at J.P. Morgan predict gas prices could remain elevated “even as far back as 2024” as supply disruptions will be hard to overcome.

No. 3 Barclays iPath Series B Bloomberg Natural Gas Subindex (NYSE: GAZ)

  • YTD Return: 124%
  • Expense Ratio: 0.45%

Although the Natural Gas Subindex is set up as an Exchange Traded Note (ETN), it can help you gain exposure to the surging gas market. An ETN differs from an ETF in that the fund consists of unsecured debt notes rather than holding a group of stocks.

The GAZ ETN seeks to replicate the returns of the Bloomberg Natural Gas Subindex by investing in futures contracts. That said, the ETN does not pay a dividend. Therefore, GAZ is best as a short-term tool.

Since the ETN is not tied to any companies, only futures, it can carry additional risks. For example, investors are left with little or nothing if the issuer defaults. In comparison, ETFs hold several companies, helping to diversify and spread risk.

At the same time, the ETN moves alongside the price of natural gas contacts. So, if you are looking for direct exposure to gas prices, the GAZ ETN may be for you.

Keep reading for more on gas ETFs to buy.

No. 2 United States Natural Gas Fund (NYSE: UNG)

  • YTD Return: 128%
  • Expense Ratio: 1.11%

The United States Natural Gas Fund is another way investors can invest in natural gas prices without physically trading futures. For one thing, UNG is a commodity pool. Or in other words, it pools investor money to invest in futures, swaps and forward contracts.

The fund aims to give investors access to daily changes in natural gas deliveries at the Henry Hub, a distribution center. As a result, the daily changes resemble changes in natural gas prices.

However, since management is consistently active, it will cost more to invest. Though the higher expense is not slowing UNGs momentum, up close to 130% YTD. Likewise, UNG is more geared for short-term trading as it holds near-month contracts.

No. 1 United States 12 Month Natural Gas Fund (NYSE: UNL)

  • YTD Return: 113%
  • Expense Ratio: 0.90%

Similarly, the United States 12 Month Natural Gas Fund is a commodity pool targeting the price of natural gas. But, UNL differs in that it holds futures contracts for the nearest 12 months.

In other words, UNL buffers itself from short-term movements. As a result, investors can gain exposure to changes in natural gas prices with less risk than short-term contracts.

If you wish to capture your piece of the soaring energy prices but want less risk of contango (higher spot price), UNL may be a better choice.

Best Leveraged Gas ETFs to Buy

To maximize your returns, you can opt for a leveraged ETF to multiply the changes in an underlying index. For example, the ProShares Ultra Bloomberg Natural Gas ETF (NYSE: BOIL) targets to return 2X the daily performance of a natural gas index.

As a result, investors can earn double the daily returns of natural gas changes. With this in mind, the BOIL ETF is up 322% in 2022 alone.

However, there is a significant risk of investing in leveraged ETFs. Though you can earn double the returns, you can also double your losses. Investing in these funds is only recommended if you are comfortable with the significant fluctuations.

Best Inverse (Short) Gas ETFs to Buy

For those that think gas prices will ease soon, finding an inverse gas ETF to buy in 2022 may be for you. Or, if you have earned a pretty penny on gas and oil stocks already, you may want to protect your downside.

Nevertheless, the ProShares Ultrashort Bloomberg Natural Gas ETF (NYSE: KOLD) is a way to earn (-2X) the daily performance of a natural gas index.

In comparison, the KOLD ETF is down 90% YTD while natural gas prices soar. So, it gives you an idea of how quickly earnings can dry up in these types of investments.

What Gas ETFs to Buy for Passive Investors

The funds listed above are the best gas ETFs to buy for capturing the explosive rise in gas prices. But, for passive investors, these may not be the best option. For one thing, the gas and oil market can change rapidly.

During the pandemic, oil prices plunged below $0 for the first time. Then, two years later, we are looking at record high prices of over $130. As a result, oil and gas ETFs are having wild swings.

Nonetheless, research from J.P. Morgan shows the cost burden of higher gas prices is around $7 billion per month. As a result, consumers have less to spend in other areas of the economy. We already see the evidence with companies like Walmart (NYSE: WMT) and Target (NYSE: TGT) missing earnings estimates while blaming transportation costs.

In short, profits are being pulled from other parts of the economy to compensate for the lack of supply and rising demand. With this in mind, the energy sector looks ready to continue its run.

The Energy Select Sector SPDR Fund (NYSE: XLE) is an excellent option for passive investors looking to gain exposure with less risk. The XLE ETF is up 48% YTD while investing in top gas and oil companies like Exxon Mobile (NYSE: XOM). No matter your investing style, with the price at the pump holding steady, these are the top gas ETFs to buy this year to get your share.

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Looking Closer at Bonds Inflation Risk

Bonds are generally considered a defensive investment and a safe haven when markets trend down or become volatile. Yet, it’s important to remember that bonds aren’t immune to economic forces. Specifically, inflation can decimate the returns bonds offer through coupon payments. Investors looking at diversifying into bonds need to be aware of bonds’ inflation risk and strategies for offsetting it.

Inflation risk can be a tricky concept to understand because it’s impacted by two diverse factors: bond interest rates and current inflation rates. Depending on the bond you hold and the macroeconomic forces affecting inflation, your bond portfolio could face more or less inflation risk than someone else’s.

Here’s a closer look at bonds’ inflation risk: the concept, how to measure it and strategies for mitigating risk over time as you build a healthy bond portfolio.

Bonds inflation risk and how to combat it.

What is Inflation Risk?

Inflation risk is the amount of your investment yield that’s eroded by inflation over time. It’s measured by subtracting the annual inflation rate from the annual yield of the investment, to arrive at the real rate of return. Investors can apply this calculation in both forward-looking and retrospective capacities, to anticipate real rate of return before investing or to calculate the efficacy of an investment after exiting the position.

Inflationary Risk Example

Stephanie holds a five-year $10,000 bond with a 10% coupon rate. The annual inflation rate is 3%. Stephanie’s bond has a diminishing rate of return year over year due to inflation risk. After year one, her $1,000 coupon payment is akin to $970. In year two, the $1,000 has a value akin to $940. This loss of value continues through the bond’s term.

How Inflation Affects Debts vs. Equities

Inflation risk affects all investments, because it’s always working against value appreciation. However, it disproportionately affects debt assets more than equities. This is because the value of bonds remains fixed over the term, whereas equities fluctuate in value and have the potential to appreciate more significantly to downplay inflationary concerns.

In the bond inflation risk example above, there’s nothing the investor can do to raise the value of that bond or the interest payments it yields. However, if they purchase stock in a company and that company appreciates 20% over the course of the year, the real rate of return can still outperform the market. Of course, this is a double-edged sword, since stock prices can also drop and exacerbate the losses incurred by inflation.

How to Combat a Bond’s Inflation Risk

Bonds are particularly at-risk for inflation concerns the longer the term of the bond. For instance, a 90-day Treasury Bill faces significantly less inflation risk than a 10-year Treasury Note. This is often the key to mitigating inflation risk within a bond portfolio.

Investing strategies like bond ladders and dumbbells are a great way to stagger bond terms in a way that allows investors to replace sub-par bonds as interest rates change against inflation. Consider this simple bond ladder:

  • A: $10,000 at 2.1%, purchased today, maturing in year one
  • B: $10,000 at 3.2%, purchased today, maturing in year two
  • C: $10,000 at 3.5%, purchased today, maturing in year three
  • D: $10,000 at 3.5%, purchased in year 2 using Bond A, maturing in year four
  • E: $10,000 at 3.5%, purchased in year 3 using Bond B, maturing in year five

Staggering maturity dates and funding the purchase of bonds with better rates is a great way to avoid inflation risk. Cycling through bonds gives income investors the flexibility they need to adapt in the face of rising inflation rates, or to take advantage of better coupon rates.

Dumbbell strategies serve much the same purpose. The strategy involves mixing short and long-term bonds to capitalize on the high yield of long-term bonds, while using short-term bonds to avoid inflation risk. It’s a strategy that requires more active portfolio management.

A Closer Look at Treasury Inflation Protected Securities (TIPS)

For investors who want to combat bond inflation risk directly, there are always Treasury Inflation Protected Securities (TIPS). TIPS directly offset the price of inflation by adjusting their principle to match. As a result, investors will never fall behind inflation and there’s no inflation risk to consider.

The downside to TIPS? There’s no way to outperform inflation. TIPS track it to preserve wealth, not accumulate it. These inflation-proof assets are usually in a bond portfolio as a safeguard or a hedge. They come in minimum denominations of $100 and are available in 5-, 10- and 30-year maturities.

It’s worth noting that TIPS are the ultimate safe haven investment, and they typically gain favor with investors during periods of extreme inflation. The current market, in 2021 and 2022, is a great example of a time when TIPS became a popular hedge against record levels of inflation, especially alongside depressed equity markets.

Inflation is an Ever-Present Concern

Bonds can be a great hedge against market downturn and inflation, but you need to utilize them correctly. Treating some bonds as a “set it and forget it” defensive investment can end poorly if investors don’t take inflation into account. Strategies like bond laddering or investment products like TIPS are a smart way to take inflation into account.

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A Closer Look at the Best Performing Bond Funds of 2022

After settling to historic lows, bond yields are coming back up. Rising interest rates are also an opportunity for retirees and passive income investors to begin exploring the best performing bond funds as a way to preserve their wealth. But, like any type of ETF or mutual fund, bond funds require a little bit of investigation before you make an investment. Namely, you want to make sure the fund is structured to meet your expectations.

Bond funds offer plenty of stability and the appeal of stable income, but not all bond funds are the same. They vary greatly depending on the type of bonds the fund holds, its objectives and strategies for fund maintenance, and even the changing nature of the bond market. To that end, it’s not always easy to pinpoint the best performing bond funds through objective analysis.

Here’s a closer look at bond funds in 2022, including the most reliable funds based on trailing returns and how they’re expected to perform in the current rising rate environment.

Find the best performing bond funds

Why Invest in Bond Funds?

The purpose of a bond fund is primarily to generate a steady stream of income through the interest payments generated by bonds. Bond funds offer a simple alternative to building your own bond portfolio. For example, instead of building a bond ladder that ensures accumulated monthly payments, an investor can invest in a bond fund that’ll deliver this same level of payout.

The other instance in which a bond fund is useful is as a portfolio hedge. Investors seeking to bring stability to an equity-focused portfolio might invest in a bond ETF. It’s a way to hedge against volatility, as well as create passive investment income that someone can reinvest in equities.

Bond ETFs vs. Bond Mutual Funds

Like equity funds, bond funds come in both ETF and mutual fund varieties. For most investors, the decision comes down to fund performance vs. expense ratio. Bond funds typically have a lower expense ratio than equity funds, but there’s still a level of active management that’s needed to ensure they perform as-expected.

The type of bonds you’re interested in can also have an effect on the type of fund you choose. Those interested in U.S. Treasuries, large corporate bonds and even municipal bonds will find both ETFs and mutual funds accessible. Those looking for riskier investments like foreign bonds or bonds from subprime issuers will want to trend toward ETFs, since most mutual funds will stick to safer investments.

The Best Performing Bond ETFs

The appeal of many bond ETFs is that it’s easy to enter and exit positions, giving bond investors flexibility to pursue the best yield. That, and there aren’t typically minimum investments for ETFs. Here’s a look at the best performing bond funds in this category:

  • Invesco National AMT-Free Municipal Bond ETF (PZA) is continually rebalanced to optimize return and averages roughly 2.3% monthly on municipal bonds.
  • iShares Core 1-5 Year USD Bond ETF (ISTB) safeguards against interest rate risk by holding short-term bonds at an extremely low 0.06% expense ratio.
  • Pimco Active Bond ETF (BOND) includes corporate and municipal bonds, as well as emerging market bonds, to produce an average yield of 2.53%.
  • VanEck Vectors Fallen Angel High Yield Bond ETF (ANGL) is a junk bond ETF that manages an impressive 3% average yield.
  • Vanguard Tax-Exempt Bond ETF (VTEB) has an extremely low expense fee of 0.06% and a respectable monthly yield of 1.83%, on average.
  • Vanguard Total International Bond ETF (BNDX) focuses on foreign bonds: specifically, non-U.S. denominated investment-grade bonds.

The Top Performing Bond Mutual Funds

Investors looking for a managed bond investment will find it in bond-focused mutual funds. Many of these funds outperform ETF funds on the surface; however, they do come with higher expense ratios that can make these investments a horse apiece. Here are some of the top performers:

  • BNY Mellon Bond Market Index Fund (DBIRX) is a short-term focused bond fund that returns 1.85% on average. It requires a minimum $1,000 investment.
  • Fidelity Total Bond Fund (FTBFX) tracks both domestic and foreign bonds for broad exposure. This fund carries an expense ratio of 0.45%, but average a return of 2.28%.
  • Northern Trust Bond Index (NOBOX) requires $2,500 to invest and has an impressive 2.13% average yield. Its expense ratio sits at 0.15%.
  • Schwab U.S. Aggregate Bond Index Fund (SWAGX) has the lowest expense ratio on this list (0.04%) and averages 1.95%. It’s also the youngest fund on the list, est. 2017.
  • T. Rowe Price QM U.S. Bond Index Fund (PBDIX) has a minimum investment requirement of $2,500. Investors should expect 1.92% yield and fees of 0.25%.
  • Vanguard Total Bond Market Index Fund (VBTLX) requires a minimum investment of $3,000 but has almost no expense ratio (0.05%). It averages 1.95% monthly.

A Smart Way to Maintain Retirement Income

For retirees and investors who rely on bonds for regular income, the performance of the fund matters significantly. To that end, it’s important to carefully select funds that have a trailing history of returns, strong managers at the helm and strategies for adapting to the bond market itself.

Want more tips on how to invest in bond funds with confidence? Discover the best investment newsletters to get the scoop on bond funds and expert picks. You’ll learn not only how to identify the best performing bond funds, but what to expect from them as the bond market continues to take shape in 2022 and beyond.

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Series I Bonds Explained

With inflation topping multi-decade records, it’s no wonder investors are looking for answers. Retired folks may be especially concerned. After all, stubborn inflation makes it harder for them to stretch their retirement income. This article will take a closer look at Series I bonds and why you might want to consider them.

Often, investors have turned to gold as an investment to fight high inflation. Some professional investors question gold’s merits as an investment. It does not produce income, and people do not use the metal for anything other than jewelry. For instance, most of the world’s gold sits in bank vaults.

There has been a correlation between inflation and gold prices in the past. If you’re skeptical that correlation can persist, you may consider Series I bonds.

Benefits of investing in Series I bonds.

What are Series I Bonds?

Series I bonds are issued by the U.S. Treasury Department. They pay a fixed interest rate plus a variable rate of interest. The Treasury determines the fixed-rate, and the  Consumer Price Index (CPI) determines the variable rate. The CPI measures how much a basket of commonly purchased goods and services changes over time.

With the surge in inflation over the last several months, the rate on Series I bonds has jumped. Currently, they have a rate of 7.12%. Keep in mind that the rate on them resets at the end of April.

March inflation data determines the variable rate for May. Inflation was 8.5%, the highest since the early 1980s. So, investors in Series I bonds could see their rate increase again.

In addition, Series I bonds are low risk. Because the U.S. Treasury issues the bonds, the bonds are backed by the full faith and credit of the U.S. government. Like other treasury-issued bonds, investors consider them to be among the safest in the world.

Though Series I bonds are issued by the Treasury, they’re different from other Treasury notes and bonds in several ways. Make sure you fully understand the ins and outs of Series I bonds before investing. Let’s take a closer look.

How to Buy Series I Bonds

The first thing you need to know about how to buy Series I Bonds is that you can only buy the bonds through the Treasury website. You cannot buy them through your regular brokerage account. Though you would not be able to use your brokerage account, the Treasury does not charge fees for the transaction.

Also, Series I Bonds come in smaller denominations than typical bonds (here’s a free traditional bond yield calculator). Investors can buy them for as little as $50, $100, $200, $500 or $1,000 each. A single investor can purchase up to a maximum of $10,000 each year. Additionally, you could also buy $10,000 for your spouse or children.

If you buy Series I Bonds with your tax refund, you’re eligible for an extra allotment. This allotment is in addition to the regular $10,000 maximum. You can buy up to $5,000 of them if you go this route.

The maximum limit will affect everyone differently. For instance, high-net-worth investors may pass on Series I Bonds because the $10,000 max limit wouldn’t be enough to make a difference in their portfolio. On the other hand, if an allocation of Series I Bonds is a meaningful portion of your portfolio, you could benefit handsomely.

Series I Bonds Interest Rates

The variable part of Series I Bond interest rates resets every six months. If you think inflation will persist for the rest of the year, these may be appealing. On the other hand, if inflation returns to normal levels, the variable part of the interest rate may decrease.

You cannot sell Series I Bonds on a secondary market. You must redeem them with the Treasury if you want to get rid of them. In addition, they have a minimum one-year holding period. Future inflation is an important consideration.

You’ll be subject to early redemption penalties if you decide to redeem your bonds in less than five years. The early redemption penalty requires you to forfeit three months of interest. After five years, there is no penalty.

In some cases, paying the early redemption penalty may not be that bad. Interest paid on bank deposits, CDs and treasury bonds are historically low. The interest you earn from Series I Bonds for one year may be a better option, even if you pay the early redemption penalty.

Readers should also note that they are good for 30 years. So, if you believe that inflation is here to stay, these could be an excellent investment for you. Although, if inflation returns to normal levels soon, the early redemption penalty may be painful.

Final Thoughts

The U.S. Treasury will announce new rates on May 2. There is much to consider if you’re interested in Series I Bonds. One of those considerations is taxes.

Interest from them is exempt from state taxes but is taxable for Federal taxes. If the bondholder uses the interest to fund education, it could be excluded from federal taxes. Please consult your tax advisor before making any decisions.

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Are Fixed-Rate Bonds a Good Investment?

Fixed-rate bonds have been a popular investment tool for centuries. Investors make an investment in a fixed-rate bond by lending money to the issuer for a specified time. At the end of the specified time (maturity), the issuer returns the investor’s money. In the meantime, the issuer pays the investor interest based on a fixed rate. Interest payments are typically semi-annual but can be annual, monthly or even weekly.

Different types of entities can issue bonds. These entities are looking to raise capital by borrowing money (principal) from investors. Bond issuers are mostly corporations or governments. A corporation may want to borrow money to run its business or pay for a project. In addition, a government may issue bonds to raise money for public services or to meet budget shortfalls.

For each bond an entity issues, it publishes an indenture. A bond indenture spells out the legal disclosures of the bond, including maturity, fixed interest rate (coupon), date of coupon payments, and certain covenants. Covenants place limits on the issuer to ensure the issuer can pay interest and principal at maturity. Fixed-rate bond investors like them because they’ve historically been a lower-risk option compared to stocks and other investments.

Investing in fixed-rate bonds.

Why Invest in Fixed-Rate Bonds

There are many reasons why investors like fixed-rate bonds. One reason is that bond investors view bonds as a safe investment. By issuing an indenture, the borrower commits to making interest and principal payments to investors. The interest and principal payments come from the profits of a corporation, taxes received by governments or revenue from specific government services.

Asset-backed bonds are like folks borrowing money against their home. A corporation can pledge assets to back the bond in some instances. For example, a corporation may borrow money and pledge real estate or other property as collateral. If the corporation cannot pay interest or principal, the investors can claim the asset, sell it and get some or all the money the borrower owes them.

Another reason that investors like fixed-rate bonds is diversification. Bonds do not change in price as much as stocks or other investments. Wild swings in the stock market can cause investors to lose sleep. By investing in a portfolio of bonds, investors may feel better that their portfolio will be more stable over time. Many investors also chose to invest part of their portfolios in bonds and in stocks.

Risks

Though investors believe bonds to be safer than stocks, there are no guarantees. For instance, a corporation may go bankrupt or choose not to pay interest or principal. These are extreme cases, but they do happen.

If a bond issuer cannot make payments, the risk investors take called default risk. If a bond issuer goes bankrupt, it will sell all its assets and pay all its debts, like bonds. Asset-backed bondholders may get their principal and any interest due from the asset’s sale. Bonds not backed by assets will get the money left over from asset sales. Stockholders are last in line for money raised by asset sales.

Bond prices have historically swung less than stocks. Though, bond prices do change. When overall interest rates change, bond prices for fixed-rate bonds also change. For instance, say you hold a bond with a 5% coupon, and interest rates drop to 4% for new bonds with the same maturity. If you want to sell your bond, you can get a higher price because a seller can either buy the new 4% bond or buy yours for a higher price so that the yield to maturity is 4%. If you hold the bond to maturity, price changes are of little concern because you’ll receive your principal at maturity regardless of the price changes.

Fixed-Rate Bond Mutual Funds and ETFs

If you’re not interested in reading through indentures, disclosures or trading bonds, you’re in luck. Fixed-Rate Bond mutual funds pool investors’ money, and a fund manager invests money in the mutual fund for you. Interest payments for the bonds held in the mutual fund are paid to investors by the fund. Each mutual fund will charge a fee for its services.

Fixed-rate bond ETFs are a bit different. You own a basket of bonds through the ETFs structure instead of a portion of the pooled assets like a mutual fund. ETFs also have managers who invest your money in bonds. The ETF manager pays you the interest on each bond and charges a fee for their services. Though, fees are typically lower than mutual funds.

Bond mutual funds and ETFs can focus on certain types of bonds. For instance, they can hold only treasurycorporate or municipal bonds. Some can focus on short-term maturity bonds, which typically pay a lower coupon but may be safer. Managers can also invest in high-yield (junk) bonds that pay a higher coupon but have higher default risk.

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Treasury Direct Bonds

What ultra-safe investment is currently paying a high interest rate? The answer is certain Treasury Direct bonds.  For instance, inflation-indexed Series I bonds issued from November 2021 to April 2022 are paying 7.12 percent for the first six months. Interest is a combination of a fixed rate and an inflation rate. While the fixed rate is annual, the inflation rate may change every six months. If the inflation rate remains high, so will the yield. Compare that with the extremely low rates offered on other safe investments such as certificates of deposit and savings accounts. For that reason, the sale of Series I bonds is booming.

Treasury direct bonds explained.

What are Treasury Direct Bonds?

Treasury bonds are government debt securities. Issued by the federal government, they are sold by the U.S. Treasury Department. Interest on treasury bonds is exempt from state and local taxes.

These bonds are sold on TreasuryDirect.gov which is managed by the Bureau of Fiscal Service.  Because the U.S. government issues Treasury Direct bonds, they are risk-free.

Treasury bonds, issued for terms of 20 or 30 years, pay interest every six months until maturity. At maturity, bond owners receive the face value. Note that once bonds mature, they no longer pay interest. Prices and yields of treasury bonds are determined at auction.

The series EE bonds, long a college savings favorite, earn a fixed rate of interest. These bonds are guaranteed to double in 20 years. In contrast, there is no guarantee that an I bond will grow to a specified amount.

In the past, Treasury bonds were issued in paper form. Now, Treasury bonds are all issued electronically.

How to Buy Treasury Direct Bonds

Purchase Treasury Direct bonds via TreasuryDirect.gov or from banks or brokers. Before buying bonds, you must set up an account. A personal checking or savings account is necessary to pay for bonds through TreasuryDirect. Such an account is also required to accept funds upon bond redemption.

As the New York Times notes, the TreasuryDirect website needs updating. While users submit bank information when signing up, changing that bank account later requires the use of a paper form. To make the change, users must print out a form and take it to their bank or credit union for bank officer certification. It is then mailed to a U.S. Treasury post office address in Minneapolis. It generally takes about 10 business days after form receipt for an updating of the TreasuryDirect account.

While TreasuryDirect representatives say that a modernization is underway that will permit users to change bank accounts without resorting to paper forms, no timetable was given. For now, if you want to set up an account to buy Treasury Direct bonds, choose a checking or savings account you plan to keep for a long time to avoid this hassle.

Buy Treasury Direct Bonds With Your Tax Refund

Expecting a federal or state tax refund? You can have that amount directed to your TreasuryDirect account by requesting the IRS or your state tax department to deposit your refund there. Purchase savings bonds once you receive the funds.

On your tax return, simply add the TreasuryDirect routing number, 051736158, in the routing number field. In the account number field, add your TreasuryDirect account number. For “account type,” choose Savings.

Competitive vs. Non-competitive Bids

Two types of bids are used at Treasury bond auctions. With non-competitive bids, the purchaser agrees to the interest rate determined at auction. The buyer receives the bonds they want at the full amount desired. Virtually all individual investors go the non-competitive route.

With competitive bids, the buyer specifies an acceptable yield. The result is:

  • Acceptance of the full amount if the bid is less than or equal to the yield determined at auction.
  • Acceptance of less than the full amount if the bid is equal to the high yield.
  • Rejection if the specified yield exceeds that of the yield set at auction.

You cannot use competitive bidding through TreasuryDirect.gov. Instead, bidders must use a bank or broker. The majority of competitive bidders are institutional investors.

Minimum and Maximum Purchase Amounts

The minimum amount needed for purchasing Treasury Direct bonds is just $100. Bond amounts rise in increments of $100.

The maximum noncompetitive purchase amount in a single auction is $5 million. For a competitive bid, it is 35 percent of the offering amount.

Treasury Direct Bonds Considerations

You won’t receive 1099 forms or statements from your TreasuryDirect account. You can view the 1099 online and print it. Make sure your spouse and heirs are aware of this account. If you die and don’t leave information about the account, the executor of your estate may never discover it. That’s because most executors use tax returns or financial statements for information about the decedent’s accounts, and TreasuryDirect won’t show up there.

There are a few items to keep in mind when purchasing Treasury Direct bonds. For example, while buyers don’t have to hold an I bond for 30 years, they do have to hold it for one year before redemption. Holding the bond for more than one year but less than five years triggers a three months’ interest penalty. Bonds held for more than five years are not subject to this penalty.

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Understanding Tax-Free Bonds

It’s not what you earn, it’s what you keep. That adage applies to investment income as well as wages. Investors in tax-free bonds don’t have to worry about the federal tax implications of certain bond income, as it is tax free. While many federally tax-free bonds are subject to state and local taxes, there are tax-free bonds that are also free from state tax. Tax-free bonds are also known as tax-exempt bonds.

Pros and cons of tax free bonds.

Federally Tax-Free Bonds

Issued by states, counties, cities and other governmental authorities, municipal bonds are the primary methods by which these entities raise capital for public project financing. Income from these bonds is from federal taxation. In fact, these are the only securities free from federal income tax. Municipal bonds are considered a safe investment. While municipal defaults are a possibility, such events are rare.

The most common types of municipal bonds are:

  • General obligation bonds: These bonds are not secured by assets. Instead, backing is via the full faith and credit of the state, city, or county issuing the bond. These issuers have the ability to tax residents so that bondholders are paid.
  • Revenue bonds: These bonds are backed by the revenues of a specific project and not by the government’s power to tax. Examples include revenue bonds for toll roads. Tolls from motorists are used to pay off such bonds.

You can purchase state-specific bonds that are free from federal, state and local tax. You must live in the state issuing these bonds in order to take advantage of state and local tax exemptions.

Keep reading for more info on tax-free bonds.

Pros and Cons of Municipal Bonds

The tax advantages of municipal bonds constitute the primary appeal for investors. Because they are fixed-income investments, bond buyers know they will receive steady, semi-annual income payments for the bond’s life.

On the con side, there’s  a call risk with municipal bonds. That means the issuer can repay the bond prior to its maturity date. When that happens, as when interest rates decline, the investor must reinvest their money at less attractive rates.

Inflation poses another risk factor. Along with purchase power reduction, inflation can lead to higher interest rates. In turn, this reduces the bond’s market value.

Bonds may suffer from a liquidity risk. Because so many bonds are purchased by investors for holding rather than active trading,  when they do want to buy or sell a bond they may not obtain the desired price. In fact, they may discover the same bond has various quotes.

State and Local Tax-Free Bonds

Income from bonds issued by the federal government is not free from federal taxation. However, such bonds are usually exempt from state and local taxes. This includes income from Treasury bonds.

Short, Intermediate and Long-term Tax-Free Bonds

Tax-free bonds are available with short, intermediate and long-term maturities. A bond’s interest rate is determined at its origination.

  • Short-term tax-free bonds: Short-term bonds have a maturity date of three years or less. Risk is lower, but so is yield.
  • Intermediate-term tax-free bonds: These maturity dates of these bonds is between two and 10 years. Because they fall into the middle of bond categories, their risk and return rate is also in that range.
  • Long-term tax-free bonds: Long-term bonds maturity dates range from 10 to 25 years. Higher yields accompany greater risk. Because the bond takes so long to mature, inflation and interest rates are more likely to affect it.

How to Buy Them

Purchase tax-free bonds from an online or full-service brokerage or bank. Such purchases come with commissions. Before buying individual bonds, determine how these securities fit into your overall portfolio and tax strategies. When buying individual bonds, keep in mind that you will not receive the principal back until the bond’s maturity.

Many investors create a “ladder’ of municipal bonds to address the need for regular income. This portfolio involves a maturity date range. As bonds mature or are sold, the principal is regularly reinvested. The investor receives a steady income stream with less exposure to interest rate risk.

For most investors, the simplest way to purchase tax-free bonds is via a tax-free bond fund or ETF. Expect to pay sales charges and other fees. In either case, you own shares of the fund, rather than owning bonds outright. While funds offer more bond diversification, fund managers may sell bonds to offset falling market value when interest rates rise. That means the fund’s value may fluctuate.

One caveat: When purchasing shares of a bond fund or ETF holding any federal government bonds, it is your responsibility to determine the amount of federal bond income received. This information is not included in the tax forms provided by the investment company.

Taxable vs. Tax-Free Bonds

Not all municipal bonds are tax-free. State and local governments may issue taxable municipal bonds that do not meet the IRS criteria for public use or public purposes. Examples include bonds issued to finance sports facilities or boost public pension funding. Taxable municipal bonds tend to offer higher yields than tax-free bonds.

It is possible that taxable municipal bonds are exempt from state and local taxes for residents of that state. Always read the related documents pertaining to the bond or consult a financial advisor to determine a bond’s tax status before investing.

Tax-Free Bonds Ratings

No two municipal bonds are exactly alike. If going the individual tax-free bonds route, perform your due diligence by examining the bond’s rating. Three major agencies rate municipal bonds. These are Moody’s Investors Service, S&P Global and Fitch Ratings. The first two agencies rate over 80 percent of municipal bonds. For all three services, the best bonds are rated Triple-A. High and upper medium grade bonds are A rated, although the different agencies use different investment grading categories. Medium grade bonds have B ratings, although again the agencies use different gradings for essentially the same rating. For instance, Moody’s highest B rating is Baa, while S&P and Fitch use BBB+.

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