ETFs For The Capital Preservationist

ETF Database

When the Federal Reserve announced recently that it plans to keep key interest rates at nearly zero until 2014, it hardly came as a surprise. With the economic recovery still in a very fragile state and inflationary pressures remaining tame, record low interest rates are expected to hang around for quite a while. While stock markets largely cheered the latest announcement, you could almost hear the exasperation of those who rely on generating meaningful current returns from their portfolios. The extension of the low rate environment means extending the challenges for yield hungry investors, such as those who rely on their portfolio to generate cash flows to cover living expenses [see also Six Juicy High Yield Bond ETFs For 2012].

Against this backdrop, more and more advisors have engaged actively in searching out securities that offer meaningful current returns for their clients. Not surprisingly, that objective generally leads to the assumption of greater risk, whether though lower creditworthiness or longer durations. There are, of course, investors at the opposite end of the spectrum, whose primary objectives focus not on maximizing current yield but on minimizing risk and simply maintaining the value of their investment. And for those looking to do a bit more than stuffing their cash under the mattress, there are some interesting ETF options out there [for more ETF ideas, sign up for the free ETFdb newsletter]: 

PIMCO Enhanced Short Maturity Strategy Fund (MINT)

Ticker 30-Day SEC Yield 200-Day Volatility
MINT  0.95%  1.19%
PRB  0.37%  4.76%
BIL  -0.11%  0.25%
GSY  0.60%  1.21%
PVI  0.26%  0.61%

This actively managed ETF from PIMCO strives to deliver “greater income and total return potential than money market funds,” but is still a very low risk investment. The portfolio has an effective duration of only about 0.84 years, and the bulk of holdings are rated A or higher. Though some exposure to both risk factors, however, MINT does manage to generate a bit of return for investors; the 30-day SEC yield is currently in the neighborhood of 1.4% [see MINT Fact Sheet].

MINT can be an appealing place to park cash, as this low volatility ETF is one of the safest options out there. MINT has returned about 0.6% over the last year, and has a 200-day volatility of only about 1.2%.

Market Vectors Pre-Refunded Municipal Index ETF (PRB)

This Market Vectors ETF offers exposure to a unique corner of the muni bond market; PRB focuses on debt that is issued by municipalities but refinanced by issuers so that it is backed by the full faith and credit of the U.S. government. So while the list of issuers includes entities such as the Illinois State Toll Highway Authority, the individual holdings are effectively backed by the U.S. government [see PRB Holdings].

With an average modified duration of less than four years, PRB is a relatively safe investment from just about every perspective. PRB has returned about 3.6% over the last year, with a 200-day volatility of only 4.7%.

SPDR Barclays 1-3 Month T-Bill ETF (BIL)

The name of this ETF sums up the investment objective quite nicely; BIL holds obligations of the U.S. government that are at the very short end of the duration spectrum. That combination results in very little risk and a relatively meager return; BIL has a 30-day SEC yield of only about 0.6%. For those looking to preserve capital, BIL can be a very effective destination [see BIL Returns].

This ETF has been flat over the last year, and has a 200-day volatility of just 0.3%.

Guggenheim Enhanced Short Duration Bond ETF (GSY)

This ETF is actively managed and seeks to outperform the benchmark to which BIL is linked, meaning that these two ETFs will have generally similar profiles. The extremely short duration combined with the high quality of the issuers makes GSY a low risk, low return vehicle that can be used for temporary cash allocations [try our Free ETF Head-To-Head Comparison Tool].

GSY also has a 30-day SEC yield of about 0.6%, and has returned about 0.3% over the last year. The 200-day volatility of just 1.2% is remarkably low.

PowerShares VRDO Tax-Free Weekly Portfolio (PVI)

This ETF might not jump out as a safe haven, but the unique features of PVI make this fund extremely appealing to those looking to limit volatility. The underlying index consists of municipal securities issued in the primary market as Variable Rate Demand Obligations (VRDOs) with interest rates that reset weekly. That essentially strips out all interest rate risk, and the focus on bonds rated A or higher limits credit risk as well. As an added bonus, VRDOs generate tax-exempt income [see Bond ETFs That Steer Clear Of Interest Rate Risk].

PVI has a 30-day SEC yield of only about 0.30%. Over the last year this fund is up about 0.5%, and has a 200-day volatility reading of only 0.6%.

Disclosure: No positions at time of writing.

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