With the markets swinging in all directions, the pickings have been slim for investors looking for the best ETFs and mutual funds. Cash isn't a solution either, as inflation continues to erode capital.
So, what to do?
For Kevin Kautzmann, founder and principal of EBNY Financial, we're clearly in a bear market. As inflation is eating into people's wallets, preserving capital is key for most investors. And for that, the best ETFs might be conservative or plain vanilla funds.
"This has been a very tough year," said Kautzmann. "It's been very hard to put people into stuff — you don't want to throw good money after bad."
New York-based EBNY is a family-owned, fee-based independent financial advisory firm with over $160 million in assets under management. It's been serving small and medium-size businesses, charter schools, nonprofits, 401(k) plans, pension funds and high-net worth individuals since 1998.
Kautzmann, who's been in the financial management business for 25 years, believes we might be in for an entire year of elevated 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 going on that I think my clients need to take advantage of and it's in the
inverted yield curve," he explained. "It's flashed several times, but now when you're talking about 1- to 2-year Treasuries paying (roughly) 4% — that'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 invests in U.S. Treasury bonds that mature between one and three years. The $27-billion fund captures some of the highest yields in today's U.S. Treasury market.
It offers a handsome SEC yield of 3.6%, while charging a low annual management fee of 0.15%. Still, it's down 4.52% year to date.
"The 1- to 2-year Treasuries are the sweet spot right now for yield, so SHY can work great in this
environment," said Kautzmann. "I also like that it has monthly income for retirees and low duration Treasuries to handle coming changes to interest rates."
Within equities, "there's not much really going on. The only thing that's working is large-cap value at this point." However, he noted that interest rates will affect large-cap profits too, so it's not an area exempt from risk.
Dividends Are The Sweet Spot
"I've been doing this for 25 years and I've been through several market crashes now, and what I always see is it's the dividends that hold up the ship," said Kautzmann. "And if you get good dividends — cash dividends, not leveraged dividends — those are the companies that (might) go down, but that have some floor to them."
As such, his second pick is iShares Core Dividend Growth ETF. The $22-billion fund invests in companies that grow their dividends.
The fund yields 2.3% and charges a low annual fee of just 0.08%. The fund is down 16% this year, however.
Its top holdings include Microsoft, Apple, Johnson & Johnson, JPMorgan Chase and Pfizer.
Going back to the bond markets, Kautzmann likes iShares Short Maturity Bond. The $4.4 billion fund invests in short-maturity corporate bonds, which fulfills the short duration aim for 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 in comparison to its peers. Top corporate bond holdings include Bank of America, Morgan Stanley, AbbVie, JPMorgan Chase, Volkswagen Group of America Finance, Humana, 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 he applies to its best investment picks. Those include a good market cap, low fees, no leverage and no derivatives.
"That's why I like some of these plain-vanilla ones," he said. "And right now, you've got to stay short duration in bond funds and ETFs. For the amount of risk relative to yield, Treasuries are a no-brainer."
