Market volatility often sends many investors scrambling to the sidelines. However, it can be a big mistake to shift all of your money to cash.
So what should highly nervous investors do? One 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 anywhere close to $500 to get started with the Vanguard Long-Term Bond ETF (NYSEMKT: BLV). The ETF's price is currently less than $73.
When you see the name Vanguard on any ETF, you can rest assured that you won't have to pay through the nose in fees. That's certainly the case with the Vanguard Long-Term Bond ETF. Its annual expense ratio is only 0.04%. The average expense ratio for similar funds is more than 20 times higher.
As its name reflects, this Vanguard ETF focuses on long-term bonds. It tries to track the performance of the Bloomberg U.S. Long Government/Credit Float Adjusted Index, which is chock-full of long-term bonds. The Vanguard Long-Term Bond ETF owns 3,091 bonds with an average effective maturity of 22.5 years and an average duration of 13.7 years.
Nearly 49% of the bonds in the fund's portfolio were issued by the U.S. government, which gives them a high degree of safety. Another 44% are commercial bonds with A or BBB ratings (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 soon reduce interest rates.
Federal Reserve Chair Jerome Powell said on July 31 that a rate cut is "on the table" for September. He noted that inflation was making progress toward the Fed's target of 2%. Powell also said that the central bank was "watching really carefully" for any signs of a labor market downturn. Two days later, the July jobs report was much weaker than expected.
The disappointing employment numbers boost the probability considerably that the Fed will lower rates next month. When interest rates go down, bond prices go up. Existing bonds become more valuable because they've locked in higher interest rates.
Long-term bonds tend to rise more than short-term bonds when interest rates decline. There's a simple reason why that's the case. These long-term bonds pay the locked-in higher rate for a longer period than short-term bonds do.
Buying long-term bond ETFs is therefore a smart move for anyone seeking to invest in bonds to take advantage of the potential rate cuts on the way. And buying the Vanguard Long-Term Bond ETF makes sense because of its super-low costs.
The main drawback
There is one main drawback associated with investing in the Vanguard Long-Term Bond ETF. It's possible that other assets could deliver even greater returns if the Fed cuts interest rates.
Real estate investment trusts (REITs) could soar if interest rates fall. These companies borrow extensively to fund expansion. Lower rates translate to lower borrowing costs and greater free cash flow.
Small-cap stocks also tend to perform well during periods with declining interest rates. While businesses of any size frequently borrow money, smaller companies are more likely to benefit more than larger ones from lower interest expenses.
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Keith Speights has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
