1 No-Brainer Bond ETF to Buy Right Now for Under $500

Market volatility often sends many investors on edge. However, it can be a big mistake to transfer all your money in cash.

So what should extremely nervous investors do? An alternative is to consider bonds. A great way to invest in bonds is through exchange-traded funds (ETFs). Here’s a no-brainer bond ETF to buy right now for less than $500.

Think long term

You won’t need close to $500 to get started with Vanguard Long Term Bond ETF (BLV 0.90%). The ETF price is currently below $73.

When you see the Vanguard name on any ETF, you can be sure that you won’t have to pay out of pocket in fees. This is certainly the case with the Vanguard Long-Term Bond ETF. The annual expense ratio is only 0.04%. The average expense ratio for similar funds is more than 20 times higher.

As the name suggests, this Vanguard ETF focuses on long-term bonds. It tries to track the performance of the Bloomberg US Long Government/Credit Float Adjusted Index, which is full of long-term bonds. The Vanguard Long-Term Bond ETF holds 3,091 bonds with an average effective maturity of 22.5 years and an average duration of 13.7 years.

Almost 49% of the bonds in the fund’s portfolio were issued by the US government, which gives them a high degree of safety. Another 44% are commercial bonds rated A or BBB (medium credit quality).

Why this Vanguard ETF is a no-brainer buy

What makes the Vanguard Long-Term Bond ETF a no-brainer buy right now? The main factor is the likelihood that the Federal Reserve will cut interest rates soon.

Federal Reserve Chairman Jerome Powell said on July 31 that a rate cut is “on the table” for September. He noted that inflation is making progress toward the Fed’s 2 percent target. Powell also said the central bank would “watch very closely” for any sign of a slowdown in the labor market. Two days later, the July jobs report was much weaker than expected.

Disappointing employment figures significantly increase the likelihood that the Fed will cut rates next month. When interest rates fall, bond prices rise. Existing bonds become more valuable because they have locked in higher interest rates.

Long-term bonds tend to rise more than short-term bonds when interest rates fall. There is a simple reason why this is the case. These long-term bonds pay a higher rate locked in for a longer period than short-term bonds do.

Buying long-term bond ETFs is therefore a smart move for anyone looking to invest in bonds to take advantage of potential rate cuts down the road. And buying the Vanguard Long-Term Bond ETF makes sense because of its very low costs.

The main disadvantage

There is one main disadvantage associated with investing in the Vanguard Long-Term Bond ETF. Other assets are likely to offer even higher returns if the Fed cuts interest rates.

Real estate investment trusts (REITs) could rise if interest rates fall. These companies borrow heavily to finance expansion. Lower rates translate into lower borrowing costs and higher free cash flow.

Small-cap stocks also tend to perform well during periods of falling interest rates. While businesses of all sizes frequently borrow money, smaller companies are more likely to benefit than larger ones from lower interest expenses.