Despite the hype, the typical bond investor may not have the risk profile to throw money at cryptocurrencies just yet, according to a recent Wall Street Journal article.
The article reported that El Salvador’s bonds headed south after it introduced Bitcoin as legal currency. While blockchain technology looks to be a prevailing trend moving forward, bond investors are reluctant to make the switch to cryptocurrencies.
As the article noted, a number of investors “remain lukewarm, however, on debt issued by cryptocurrency evangelists. Investors buy bonds for relatively safe but stable returns—the inverse of cryptocurrencies, which are subject to meteoric rises and equally extreme declines.”
That’s not to say that bond investors aren’t looking for yield, especially in the current market environment where yields are still historically low. However, the fluctuations of the cryptocurrency market aren’t for the weak of heart.
“There’s so much uncertainty in this space and it’s not a level of uncertainty that bond markets are accustomed to,” said Lisa Ellis, an analyst at MoffettNathanson LLC who covers cryptocurrency exchange Coinbase. “Bond markets are risk-averse.”
“It’s not unheard of, every four years or so, to see a pullback of as much as 75% in bitcoin,” said Rich Repetto, a stock analyst at Piper Sandler & Co. “You want to be shored up for that rainy day.”
A Not-Too-High-Risk, High-Reward Option
Risk-averse investors who don’t want the stomach-churning price volatility can opt for high-yielding dividend ETF options. One from Vanguard is worth a look: the Vanguard High Dividend Yield Index Fund ETF Shares (VYM ).
The fund employs an indexing investment approach designed to track the performance of the FTSE® High Dividend Yield Index, which consists of common stocks of companies that pay dividends that are generally higher than average. The advisor attempts to replicate the target index by investing all, or substantially all, of their assets in the stocks that make up the index, holding each stock in approximately the same proportion as its weighting in the index.
In summary, VYM:
- Seeks to track the performance of the FTSE® High Dividend Yield Index, which measures the investment return of common stocks of companies characterized by high dividend yields.
- Provides a convenient way to track the performance of stocks that are forecasted to have above-average dividend yields.
- Follows a passively managed, full-replication approach.
For more news, information, and strategy, visit the Fixed Income Channel.