Two months ago, I wrote about four bond ETFs that were worth owning for various reasons in an uncertain rate environment. The investment case for those ETFs still holds. But the market today is harder to evaluate than the one in March.
Since then, markets have remained volatile. The 10-year Treasury yield has gone from 4.3% up to nearly 4.7% and back down to around 4.45% today. The market has completely priced out rate cuts for the remainder of 2026. Oil prices are still elevated and could push the annualized inflation rate back to 4% very soon.
If you're still looking at fixed-income yield options today, there are a few different ways to play it.
Image source: Getty Images.
Option 1: Take all risk off the table and take the yield
ETF to buy: iShares 0-3 Month Treasury Bond ETF (SGOV +0.03%)
Trying to figure out whether rates are going to go up or down from here can feel a bit like gambling. You might be right. You might not. But it's challenging to have real conviction in either direction.
Sometimes the best option is to just take the yield that's being offered to you and remove rate risk from the equation.
NYSE: SGOV
Key Data Points
This ETF currently offers a yield of around 3.5%. That's not as high as the 5% yields the fund was paying back in 2024. But with rate cuts likely off the table for the foreseeable future, 3.5% might be as low as this yield goes for at least another year.
With so many variables in the financial markets and the economy right now, why not remove the headaches and anxiety altogether and just take the income?
Option 2: Add some duration risk and hope that an end to the Iran war brings rates down
ETF to buy: iShares 7-10 Year Treasury Bond ETF (IEF 0.17%)
Interest rates have been predictably volatile ever since the Iran war started. The spike in inflation we've seen over the past few months has largely been driven by rising oil prices. But there's a case to be made that once the war reaches a resolution, both inflation risk and interest rates could come back down.
NASDAQ: IEF
Key Data Points
This ETF adds modest interest-rate risk, but not credit risk. The duration of this fund is about eight years, which means that for every 1% drop in interest rates, the share price could be reasonably expected to rise by around 8% and vice versa. If you're right in your belief, there's upside to be had with this ETF. But if you're not and we're in a higher-for-longer rate regime, risk rises significantly.
The current 4.3% yield offered by this fund is an income improvement. You could also consider dropping down to something like the iShares 1-3 Year Treasury Bond ETF (SHY 0.06%) if you want to lower your rate risk further.
Option 3: Simply focus on quality and yield
ETF to buy: iShares iBoxx $Investment Grade Corporate Bond ETF (LQD 0.01%)
If you believe that rates are going to fall and have a bit more conviction in that outcome, there's the option to be a bit more aggressive in your portfolio positioning. I wouldn't get too aggressive here, given that the geopolitical tone seems to shift every other day. But there are opportunities to just gently move more in that direction.
NYSEMKT: LQD
Key Data Points
The iShares iBoxx $Investment Grade Corporate Bond ETF has similar duration risk to the iShares 7-10 Year Treasury Bond ETF, but now adds credit risk to the mix -- not a lot, though. This portfolio limits itself to only investment-grade corporate credit, but investors should still expect another added layer of variability by going this route.
The yield on this fund goes up to 5.2%, but there's the risk of being wrong with your rate direction belief and watching the share price decline due to both interest rates and credit conditions at the same time.
In my opinion, the iShares 0-3 Month Treasury Bond ETF is the best choice for the current environment. Trying to guess where the geopolitical environment is heading next is a mistake. On a daily basis, we see news of a near-agreement to end the war, followed by new missile attacks in the Middle East. It's very difficult to have a high conviction in the outcome.
This ETF gives you a reasonable yield while removing risk from the equation. From a risk/reward perspective, it's the best option right now.
