Jamie Cameron

For some, the current situation is a nightmare. For others, it's the perfect shopping opportunity. But choosing the right sector or instrument can be hellishly difficult. But a world-renowned economist says he has a recipe for everyone.

Mohamed El-Erian is a world-renowned economist

We're all investors here at Bulios, so it probably doesn't need to be explained to you that holding cash may not be a wise move in the face of rampant inflation . Moreover, it is now at historic levels that the Fed is failing to tame with its strange moves.

This is one reason why many investors are holding stocks and bonds instead. Or, more often, it's why we invest in the first place. But according to Mohamed El-Erian, who is based at Cambridge University and chief economic adviser to Allianz, it may be time to opt for something different, something unusual.

"We need to get out of these distorted markets that have caused a lot of damage," he said in an interview.

Both the stock market and bond market have been plunging recently, and El-Erian notes that when these market corrections occur simultaneously, investors should move to riskier assets. Which is interesting because most professionals don't presume to recommend aggressive choices or strategies.

The major index is falling - and so are bond yields. Which, according to El-Erian, is completely unacceptable

"Since mid-August, we've learned again that stocks and bonds can fall at the same time," he says. "In that world, you have to look for short-term fixed income."

Only where to find it?

You can stash cash under your mattress or put it in a savings account. Or you can use a so-called short-term bond ETF.

What are Short-Term Bond ETFs?

Bond ETFs are a type of exchange-traded fund that invests exclusively in bonds. They're similar to bond mutual funds because they hold a portfolio of bonds with different specific strategies - from U.S. Treasury bonds to high-yield bonds and duration.

Bond ETFs are passively managed and trade similarly to stock ETFs on major exchanges.

Unlike individual bonds, which are sold off-exchange through brokers, bond ETFs are traded throughout the day on a centralized exchange. The structure of traditional bonds makes it difficult for investors to find a bond with an attractive price. Bond ETFs avoid this problem because they trade the classic way - like stocks.

They can thus provide investors with the opportunity to gain exposure to the bond market with the ease and transparency of trading stocks. Bond ETFs are also more liquid than individual bonds and mutual funds, which trade at one price per day after the market closes. And in times of crisis, investors can trade a bond portfolio even if the underlying bond market is not performing well.

Bond ETFs pay interest through a monthly dividend, while any capital gains are paid through an annual dividend. For tax purposes, these dividends are treated as either income or capital gains. However, the tax efficiency of bond ETFs is not a big factor because capital gains do not play as big a role in bond returns as they do in stock returns.

A typical representative of such an ETF might be the $BSV Fund Vanguard Short-Term Bond ETF.

The fund focuses heavily on U.S. Treasuries, which accounted for 67.9% of its holdings as of September 30. At the same time, it also invests in corporate bonds and international bonds. Currently, the 30-day SEC yield on BSV is 4.75%. The fund boasts a very low expense ratio of just 0.04%.


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Disclaimer: This is in no way an investment recommendation. This is purely my summary and analysis based on data from the internet and other sources. Investing in the financial markets is risky and everyone should invest based on their own decisions. I am just an amateur sharing my opinions.

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