If you can keep your emotions in check, the volatility in stocks sets up a long-term buying opportunity. However, investors with a lower risk tolerance may want to consider defensive investments that keep them in the market. In 2025, that may mean it’s time to invest in bonds.
Historically, stocks and bonds have an opposite correlation. For much of the last 15 years, historically low interest rates have been great for stocks, particularly technology stocks, but bonds weren’t a great investment. But in a higher-for-longer interest rate environment, this asset class may be making a comeback.
The macroeconomic conditions in the United States offer support for that. The U.S. government has $28 trillion in 2-year Treasury debt to roll over this year. To do that, Treasury Secretary Scott Bessent wants lower bond yields, which means a higher price for bonds (bond prices and yields move in opposite directions).
However, one of the concerns about investing in bonds is liquidity. That is, you’re agreeing to tie up your money for the bond’s prescribed length of time. Bond exchange-traded funds (ETFs) can be a way to get the benefit of higher bond prices with the liquidity of owning stocks. Here are three bond ETFs to consider.
This Fund Could Help Keep You Ahead of Inflation
The latest readings on inflation show that Americans will still have to deal with rising prices for some time to come. One way to help beat inflation is with the iShares TIPS Bond ETF (NYSE:TIP).
While it’s true the Federal Reserve counts on a little inflation every year (around 2%) to grow the economy, the current rate is around 2.6%. That’s down significantly from the last two years, but when it comes to inflation, it’s important to note that close doesn’t count. Prices are still rising higher than the ability of most income to keep up. And the ongoing trade war will only pour more gasoline on that fire.
The iShares TIPS Bond ETF tracks the performance of the Barclays U.S. Treasury Inflation Protection Securities (TIPS) Index, which measures the performance of the United States' inflation-protected public obligations.
The TIP ETF has taken a round trip from the 52-week high it made around September 2024. The fund is also off the five-year low it made in October 2023. The fund carries a low expense ratio of just 0.19% and pays an annual dividend with a 6.75% yield as of March 2025.
What If Interest Rates Stay Higher for Longer?
The rally that pushed stocks higher in the last three quarters of 2024 has reversed for many reasons. One of those is the concern that the Federal Reserve will not provide as many interest rate cuts as investors previously expected.
The CME Fed watch tool still shows about a 30% chance of a cut in June and maybe a couple more before the year's end. But if inflation remains sticky, all bets are off.
Higher interest rates would be bearish for stocks but would be bullish for 10-year Treasury bonds. And one way to capitalize on that is with the iShares 7-10 Year Treasury Bond (NYSE:IEF) ETF (NASDAQ:IEF). The fund’s underlying index is the Barclays U.S. 7-10 year Treasury Bond index, it has a low 0.15% expense ratio and pays an attractive dividend with a yield of 3.59% as of this writing.
Of course, analysts have mixed opinions about inflation. However, renowned fund manager Ken Fisher increased his stake in the IEF ETF in the fourth quarter of 2024. At that time, his portfolio held over 49 million shares, and the ETF carried 0.28% of the portfolio’s weight.
But What If the Fed Cuts Rates More Aggressively?
The Trump administration has made no secret of its desire for lower interest rates. That doesn’t mean it can speak them into existence, but if the administration is successful at cutting federal spending, which is widely accepted as the primary reason for the spike in inflation, then the Federal Reserve may have no choice but to cut rates.
That means focusing on the short end (or short-term) of the bond yield curve. The Vanguard Short-Term Treasury Index ETF (NASDAQ:VGSH) is also a solid choice.
The fund has been flat for much of the last six months, which mirrors the current uncertainty regarding interest rates.
But if you look back over the last 12 months, you can see how the VGSH surged in advance of the Fed’s rate cuts that started in late summer.
The fund has an expense ratio of 0.04% and a dividend yield of 4.16%.