Bonds Have More Return Potential Than Cash Over Time | ETF Trends

The current market volatility may have spooked many investors to remain on the sidelines and wait it out while the markets continue fluxing up and down. However, those investors could be missing out on potential returns, even in the bond markets.

The bond markets have been a tricky environment to navigate. With rising interest rates and higher yields, it’s a tug of war between trying to get more yield and mitigating rate risk.

Despite this, staying invested is a better option versus staying in cash. Even with the bond market being as fickle as it is, it’s still a more potent bet in the long run.

“I think the big drawback is that, likely over any period of time, cash returns will be lower than bonds,” said Christine Benz, Morningstar’s director of personal finance and retirement planning. “We think of starting yields as being a good predictor of what you’re apt to earn from an asset class over the next decade.”

“Yields on cash instruments are in the neighborhood of like 0.5% today,” Benz noted. “Now we’re at the point where intermediate term bonds are yielding closer to 2.0% today. I think that there is going to be a return differential for people who have reasonably long holding periods; the big disadvantage of holding cash is that you’re kind of locking yourself into a fairly low yield.”

An Active Bond Option

When seeking to build a diversified bond portfolio while also realizing income and capital appreciation, ETF investors can turn to the T. Rowe Price Total Return ETF (TOTR). The fund seeks to offer maximum returns for investors primarily through income, as well as capital appreciation by investing in a diverse set of bonds and debt instruments.

Given its active management strategy, TOTR can flex with changing market conditions while still seeking strong returns. The fund primarily invests in U.S. intermediate-term bonds with a weighted average duration of six years, but it has the freedom to purchase bonds across the yield curve.

Debt holdings include those issued by the U.S. government and its agencies, corporate bonds, bank loans, and various types of mortgage-backed and asset-backed securities. The fund has a 30-day SEC yield of 2.83% as of January 31.

For more news, information, and strategy, visit the Active ETF Channel.