The first step is rebalancing, says Yves Rebetez, managing director of ETF Insights, a Toronto-based ETF education company. Since January, the S&P 500 has climbed 10 percent, likely putting many people's asset allocation out of whack. Simply selling some equity ETFs and reallocating that money into bonds will go a long way to safeguard a portfolio.
"With equities at pretty much all-time highs and valuations extended, the first step to becoming more cautious would be to rebalance," he says.
After that, investors could consider money market–like ETF options — ETFs that invest in extremely short-term treasuries — but with most paying next to nothing, a shorter-term bond fund may make more sense, says Alex Bryan, director of passive strategies research at Morningstar.
He suggests looking at the PIMCO Enhanced Short-Term Maturity Active ETF (MINT), which acts almost like a money market fund but invests in slightly longer-dated treasuries and corporate bonds. Its average duration is 0.39 years, and it has 1.54 percent yield, while most money market funds have a 90-day duration and pay less than 1 percent.
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"It invests in securities that are just beyond the reach of most money market–fund managers," says Bryan. "So it gets more yield by going a little longer on the curve."
Another option is to allocate more money to a broad-based bond fund, like the Vanguard Total Bond Market ETF (BND), which holds 8,137 bonds, about 64 percent of them government issues. With an average duration of 6.1 years, it has a decent 3 percent yield, but it's not too long dated to be impacted significantly by rising yields, which can cause bond prices to fall.
"It should be able to weather market volatility better than lot of active bond funds, which do take on a bit more credit risk," says Bryan.