As savings and CD rates have come down, I've begun to look anew at other sources of reliable income. After all, earning 1.5% on my money just isn't going to do it right now. So I've begun to look at options trading again (see my post on QQQQ) to generate income and also moderate to high dividend ETFs.
In the ETF space, I'm looking for an investment that is relatively safe, can provide a yield over 3%, and has a good track record of performance. If the ETF is comprised of bonds then I'd like some hedge for interest rate risk and a relatively short duration.
The iShares Barclays TIPS Bond ETF (TIP) fits those categories. It provides a current yield of 4.09%. Because the ETF is comprised of TIPS, Treasury Inflation Protected Securities, the value is protected against inflation. So, while most bonds will lose value as interest rates rise (if they do) TIPS should do a much better job of maintaining their value. Read a full explanation for how TIPS work. TIPS are a form of Treasury Security, and thus they are backed by the full faith and credit of the US Government. Defalt risk is virtually 0.
What's nice about buying the ETF versus individual TIPS is that you can benefit from the ETF having some older TIPS that have higher interest rates. Thus, while the current 20 year TIP is only yielding 2.06%, the TIP ETF is providing over 4%,
Is It Better to Invest in an Individual Bond or a Bond Fund?
There are risks in the TIP ETF not present when deposting money into a savings account or a CD. If interest rates spike but inflation does not, then the fund will lose value. This could happen if the markets decide to stop buying Treasuries. So far though, investors have been more than eager to scoop up US debt (Strong 1-Year Treasury Auction Quells Rate Fears - For Now).
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