Want to diversify your portfolio and balance out your risk? You might consider investing in bonds. And some of the safest bonds around are issued by the U.S. government.
What are government bonds?
Bonds are a debt investment. Which means when you buy a bond, you provide the issuer with a loan, and they agree to pay you back, with interest.
How do government bonds work?
The U.S. issues bonds called Treasuries.
When you buy a U.S. Treasury, you’re lending money to the federal government for specified periods of time, which can range from days to years.
The shortest term bonds are called Treasury bills, which mature before one year. Treasury notes generally last from two to ten years. And Treasury bonds are for between ten and 30 years.
Because investors view government bonds as safe investments, their interest rates tend to be lower than other forms of debt.
Who buys U.S. government bonds?
The U.S. Bond market is enormous, worth about $14 trillion. And in addition to individual investors, plenty of countries around the globe line up to purchase U.S. debt, because it’s considered so secure.
For example, Japan owns more U.S. debt than any other nation, valued at approximately $1.1 trillion. It’s followed by China and Ireland, which own $1 trillion and $300 billion of U.S. Treasuries respectively.
Major foreign holders of U.S. treasury securities (billions of dollars). Source: Treasury.gov
Why invest in U.S. government bonds?
When you buy bonds issued by the U.S. Treasury, they’re backed by the full faith and credit of the government. And the United States federal government has (almost) never defaulted on its bonds.
The U.S. economy is the largest in the world, with a GDP of over $18 trillion. And the U.S. government’s credit rating is AAA, the top rating from debt rating agencies Fitch and Moody’s, and AA, the second highest rating offered by Standard and Poor’s (S&P).
Government bonds: What’s the risk?
U.S. Treasury bonds are considered to be one of the safest investments out there.
When building a portfolio it’s important to have exposure to both debt and equity. This helps diversify your investments and reduce overall risk.
Uncle Sam is best when considered as a part of a diversified portfolio. An ongoing concern with bonds is that if the Fed increases interest rates bond prices will decline, and your return may suffer a bit.
That’s because interest rates affect bond prices. When interest rates go up, bond prices tend to fall, and vice versa.
What’s inside the Uncle Sam ETF?
Uncle Sam’s underlying fund is the Vanguard Intermediate-Term Government Bond ETF. Ticker symbol VGIT. This fund seeks to track a government bond index. It primarily invests in bonds with maturations between three and 10 years.
- Bonds are a great option for those looking to balance out the risk to their portfolios.
- The Uncle Sam ETF is best when considered as a part of a diversified portfolio.
- There’s still some risk: Bond prices can be adversely affected by interest rates
Recommended Reading: Stash’s Guide to Investing in Debt