Bond Alternatives May Be a Good Idea Right About Now
Interest rates are poised to rise, which is bad news for bonds. Investors seeking a measure of safety along with the possibility of a return have a few choice alternatives to consider instead.

Most people think bonds are safe, but in today’s volatile climate, they are not.
In the not-too-distant past, bonds were portrayed as a secure part of a portfolio – a safer investment than stocks. Investors looked to government bonds as the bedrock of a stable retirement income. But bond yields are extremely low these days, prompting some investors to seek alternatives. This has sparked renewed interest in various investments that can generate passive income and stability.
Most people don’t remember what a bad bond market looks like because we haven’t seen one for 30-plus years! We’ve had steadily declining interest rates since the mid-1980s. Bond prices move in the opposite direction of interest rates. If interest rates rise, bond prices fall, and vice versa. The Federal Reserve has indicated it will be raising interest rates in 2022 and slowing its purchase of bonds, so the climate is likely to be less favorable for long-term bonds going forward. And with bonds paying historically low interest rates, long-term bonds falling in price could mean a low-yield investment for years.

Sign up for Kiplinger’s Free E-Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
The problem with bond mutual funds
Bonds issue at par value of $1,000, and you are in effect loaning a corporation or some form of government your $1,000. There is a length of time you have to leave it there, until it reaches what is known as its maturity date, which can range from one year to 40-plus years. There will be a set interest rate for that length of time. So, if interest rates rise and bond prices fall, you can hold until maturity and get your $1,000 back.
A huge issue is that most people don't hold their bonds directly anymore; rather, their bonds are in mutual funds. And within mutual funds, there are two problems: There is no set interest rate, and there is no maturity date. So when interest rates rise and your bond prices fall, there is no date in time when you will get your $1,000 back.
Three other investments to consider instead
To avoid getting trapped while the outlook on bonds is not all that bright, here are some alternatives that can provide more security and a decent rate of return:
Fixed annuities and fixed index annuities
Fixed annuities, sold by insurance companies, offer long-term tax-deferred savings and monthly income for life. They involve an upfront payment by an investor for a series of guaranteed income distributions from an insurance company. The insurer guarantees the buyer a fixed interest rate on their contributions for a specific period of time. The value of the buyer’s principal, even if interest rates rise, stays the same.
You can also choose a fixed index annuity, where your principal is protected and the return is tied to a market index, like the S&P 500. If the market is down, the worst you can do is zero (zero is the hero), and it will have a participation rate on the upside. So as an example, if we have a 50% participation rate and the S&P 500 is up 12%, then 6% would be credited to your account on your anniversary date, and that new value is locked in and can’t drop below that value because of a market decline.
Annuities often generate more income than bonds of similar maturity purchased at the same time. Only the annuity’s return on investment is taxable, while the premium portion of each payment is returned tax-free. Bond income is completely taxable. And because annuities aren’t priced daily in an open market as bonds are, they are better than bonds at holding their value while generating a more predictable cash flow.
Buffered or defined-outcome ETFs
Buffered or defined-outcome exchange traded funds (ETFs) offer investors protection from severe dips in the stock market. They are seen as solid alternatives to bonds because they allow more access to various investment products. In many portfolios, bonds traditionally served as a ballast, helping offset the risk of equities. But with interest rates so low, buffered/defined outcome ETFs are replacing bonds in some portfolios.
These ETFs set an exact percentage in losses – 9%, 10%, 15%, 20% or 30% – that shareholders are protected from over a 12-month period. In exchange for limiting an investor’s downside, some of the gains are capped at 10%, 15% or 20%.
Most buffered/defined outcome ETFs are linked to the S&P 500 Index and use flexible exchange options (FLEX), which allow both the contract writer and the purchaser to negotiate different terms.
Real estate investment trusts
This is the best-known bond alternative, created in the 1960s to provide investors a way to invest in funds that own, manage and/or finance income-generating real estate. The REIT investment space is enormous; investors can target specific real estate segments and diversify across different segments. They get 90% of the profits.
REITs are tax-advantaged as dividends and trade like stocks. And unlike bonds, which pay a fixed amount of interest and have a set maturity date, REITs are productive assets that can increase in value indefinitely. Many REITs have dividend yields between 5% and 10%. Be careful though – many REITs are not liquid if you need access to your money in the short term.
Alternatives to bonds do offer higher yield potential. But remember – that comes with risk. It’s wise to work with an adviser to go over your options as you assess your portfolio. Differentiate between safe and risky assets, and structure your portfolio in a way that makes the most sense for you.
Dan Dunkin contributed to this article.
The appearances in Kiplinger were obtained through a PR program. The columnist received assistance from a public relations firm in preparing this piece for submission to Kiplinger.com. Kiplinger was not compensated in any way.
Profit and prosper with the best of Kiplinger's advice on investing, taxes, retirement, personal finance and much more. Delivered daily. Enter your email in the box and click Sign Me Up.

Patrick Mueller, president of Bella Advisors, is a licensed investment adviser representative, an RFC (registered financial consultant) and co-author of "Dare to Succeed." He has passed the Series 65 securities exam and is a licensed insurance agent in Georgia, Alabama and Florida.
-
13 Answers to Pressing Social Security Questions
From smart claiming strategies for couples to tips on maximizing your monthly check, we have advice that can help you.
-
Keep Tax Collectors at Bay with Muni Bond Funds
Municipal bonds can be good insurance against inflation — and interest is tax-free. But as with all investments, understanding risk is key.
-
Eight Tips From a Financial Caddie: How to Keep Your Retirement on the Fairway
Think of your financial adviser as a golf caddie — giving you the advice you need to nail the retirement course, avoiding financial bunkers and bogeys.
-
Just Sold Your Business? Avoid These Five Hasty Moves
If you've exited your business, financial advice is likely to be flooding in from all quarters. But wait until the dust settles before making any big moves.
-
You Were Planning to Retire This Year: Should You Go Ahead?
If the economic climate is making you doubt whether you should retire this year, these three questions will help you make up your mind.
-
Are You Owed Money Thanks to the SSFA? You Might Need to Do Something to Get It
The Social Security Fairness Act removed restrictions on benefits for people with government pensions. If you're one of them, don't leave money on the table. Here's how you can be proactive in claiming what you're due.
-
From Wills to Wishes: An Expert Guide to Your Estate Planning Playbook
Consider supplementing your traditional legal documents with this essential road map to guide your loved ones through the emotional and logistical details that will follow your loss.
-
Your Home + Your IRA = Your Long-Term Care Solution
If you're worried that long-term care costs will drain your retirement savings, consider a personalized retirement plan that could solve your problem.
-
I'm a Financial Planner: Retirees Should Never Do These Four Things in a Recession
Recessions are scary business, especially for retirees. They can scare even the most prepared folks into making bad moves — like these.
-
A Retirement Planner's Advice for Taking the Guesswork Out of Income Planning
Once you've saved for retirement, you'll need your nest egg to support you for as many as 30 years. For that, you need a clear income strategy, not guesswork.