Latest Trends in Investment: Mutual Funds and ETFs, Bonds, and Beyond

Investing, at its core, remains about making money from your capital. As new information becomes public, investments exposed to it quickly reprice up or down. Despite the rapid advancement of financial tools and markets, the fundamental principles of investing have remained consistent. However, the investment landscape is continuously evolving, with some notable trends emerging in recent years.

1. Mutual Funds vs. ETFs: A Shift in Favorites

For a period of about two years, mutual funds were the primary favorite among investors. However, they have now fallen out of favor, with many opting for the more flexible and cost-effective ETFs (Exchange Traded Funds).

For instance, if one wanted to invest in the SP 500, they could choose a Vanguard mutual fund like VFIAX, or opt for its equivalent ETF, VOO. The appeal of ETFs stems from their cost-effectiveness and ease of use. It would cost approximately $30 to buy shares of VFIAX, whereas buying VOO would only cost around $3.75.

In addition to VOO, one can now easily access the broader market via an ETF such as VTSAX, which tracks the total U.S. stock market, or the SPDR SP 500 ETF Trust (SPY), which specifically tracks the SP 500.

2. The Resurgence of Bonds

The bond market is experiencing a significant resurgence. Back in 1981, 10-year US Treasury bonds hit an all-time high of 15.82%. However, these yields had steadily declined over the following four decades. In early 2021, 10-year US Treasury yields reached an all-time low of 0.318%. This trend has now reversed, with current yields in February 2023 at around 3.9%.

For a risk-free investment, this is quite attractive and presents stiff competition to stocks, which can be highly volatile. However, it is essential to exercise caution when investing in instruments like the VGIT Treasury ETF. As yields rise, ETF prices tend to fall, leading to poor historical performance. Therefore, it might be wise to hold off until the Federal Reserve completes its rate hikes before investing in Treasuries.

3. A 50/50 Allocation Strategy

If you find investing overwhelming or prefer not to spend endless hours researching, a simple yet effective approach could be a 50/50 allocation to VOO and a short-term bond ETF. VOO, as mentioned, tracks the SP 500, while a short-term bond ETF might include a fund that focuses on Treasury bills or a general short-term bond fund like AGG (iShares Core U.S. Aggregate Bond ETF).

This strategy helps balance the portfolio by combining the growth potential of stocks with the stability offered by bonds. A 50/50 split can help mitigate risk, as bond performance can have a stabilizing effect on the portfolio during market fluctuations.

Conclusion

In conclusion, while the core principles of investing remain unchanged, the instruments and asset classes favored by investors have evolved. Mutual funds remain a viable option, but ETFs are gaining momentum due to their cost-effectiveness and convenience. Meanwhile, bonds are enjoying a resurgence, offering a more stable alternative in an increasingly volatile market. A well-thought-out investment strategy, such as a balanced 50/50 split, can provide both growth and stability.

Remember, it is important to stay informed about the latest trends and to make informed decisions. Always consider your personal financial goals and risk tolerance before making any investments.