1

I would like to put some percentage of my money in an investment that only goes up, even if it goes up only by a small amount. One way to do this would be to put my money in a bank account, but I’d like a higher rate of return than that. Is there an investment which has a very low chance of going down, but which offers a higher rate of return than a bank? Preferably an ETF.

I thought Bond ETF’s would do that. But when I look at supposedly safe Bond ETF’s like this, they seem to often go down. Apparently when interest rates go up the prices of the bonds in such bond funds go down, and that causes the value of the fund to go down.

Are there Bond ETF’s which only expose you to (low) default risk and not to interest rate risk? Or some other kind of ETF which has a very small chance of going down?

  • 4
    Everybody wants an investment which never goes down, but that pays more than the bank. It doesn't exist. – RonJohn Jan 16 at 21:48
  • 1
    @RonJohn What about something that rarely goes down? Something that offers a slightly better return than a bank in exchange for slightly more risk? – Keshav Srinivasan Jan 16 at 21:51
  • 1
    You could always buy individual bonds... – RonJohn Jan 16 at 21:52
  • 1
    Of course, you'd have to hold them until maturity. – RonJohn Jan 16 at 21:54
  • @RonJohn Well, I want an ETF that does that. I want an investment which I can sell at any time and which has a low chance of me having to sell it at a lower price than what I bought it for. – Keshav Srinivasan Jan 16 at 22:12
3

The thing you're wanting to avoid, which you called "interest rate risk", has the formal name of duration risk. It's actually calculated as (effective duration * interest rate volatility), but it's named after the duration rather than the interest rate.

That also tells you how to minimize it. Choose a fund with an extremely low effective duration. The one I use is JPST.

Any fund in the same category could serve, such as BIL, ICSH, or GSY. The category name "Ultrashort Bond" sounds like it is inverse (short) leverage (ultra) on bonds... but it isn't. Rather it is long on bonds with ultrashort duration.

ETFdb actually calls these "Money Market ETFs"


In addition to (very low) default risk, the premium/discount is affected by demand. When the market is all "flight to safety", demand for low risk ETFs is up and there will be a price premium vs net asset value. When the market is hot and investors have the fear of missing out, demand for low risk is down, and there will be a discount vs NAV. This is probably somewhat correlated with interest rate volatility. But due to ETF efficient price arbitrage, demand only affects the price by a couple pennies (or equivalently, about 1-2 week's returns).

If you look at the price chart, this is the noise. The big sawtooth signal is payout of dividends monthly.

enter image description here

  • One can infer from the graph that if you reinvest the dividends in the same instrument that you'd see fairly uniform returns. – D Stanley Jan 17 at 0:56
  • Does this give a higher return than a bank account? And can we put a number on how big the default risk is? – Keshav Srinivasan Jan 17 at 1:58
  • @KeshavSrinivasan: Yes, higher return than bank accounts (with the exception of specialty accounts with velocity requirements). No, I have no idea how to quantify that risk. If the housing bubble taught us anything it is that bond ratings are meaningless. Not all bonds are equally risky but you can't trust the rating to tell them apart. – Ben Voigt Jan 17 at 14:42

Not the answer you're looking for? Browse other questions tagged or ask your own question.