Best Low-Risk Investments

As an investor, you search for that dreaded and elusive balance between risk and reward. It is everyone’s dream to identify low-risk investments that provide an opportunity for a hefty return. Isn’t it human nature to seek the best of both worlds — low risk and high return? 

Although maintaining the low-risk/high-return ratio is difficult to achieve on a consistent basis, you can aim for a balanced and realistic approach. Before examining some of these opportunities, let’s review several traditionally low-risk investments and where they stand at the beginning of 2021.

Quick Look at the Best Low-Risk Investments:

• U.S. Treasury Bills, Notes, and Bonds
• Equities
• REITs
• Banks and Financial Stock
• Utilities
• Gold and Silver

U.S. Treasury Bills, Notes and Bonds

U.S. Treasury securities have always been the first choice when it comes to fixed-income investments. They’re considered risk-free investments because they are backed by the full faith of the U.S. government.

The following are securities’ typical maturations: 

• Treasury Bills are securities that mature within 1 year.
• Treasury Notes are securities that mature between 1 and 10 years.
• Treasury Bonds are securities that mature up to 30 years.

Treasury securities fluctuate in price and can be risky if you trade them, but the principal and interest are guaranteed if you hold them to maturity. For example, if you invest $1,000 in a 5-year note that yields 2%, you will receive a 2% payment every year ($20) and will get your $1,000 back when the note matures in 5 years.

The higher the yield (the interest on the security), the more attractive the security is. And here’s where the problem is in the current environment — interest rates are the lowest in history. The following chart of the 10-year U.S. Treasury Note illustrates a clear downtrend over the last 40 years. Interest rates have been falling since the early 1980s.

This is a function of a deflationary economic cycle caused by technological progress, access to information and global competition. The 10-year U.S. Treasury yield had steadily declined from nearly 20% in the early 1980s to nearly 0% in 2020. Some industrial nations like Japan, Germany and several others saw their treasury yields go below 0!

Here is where Treasury yields stand today:

• 3-month bill: 0.06%
• 6-month bill: 0.08%
• 12-month bill: 0.09%
• 2-year note: 0.11%
• 5-year note: 0.41%
• 10-year note: 1.04%
• 30-year bond: 1.80%

Treasury yields affect everything in finance. They are the foundation of macroeconomics, which influence real estate markets and mortgage rates, bank savings accounts, corporate bonds, equity valuations and dividends, money market funds, currency spreads and investors' risk-taking behavior.

CDs and Bonds

If interest rates were higher, the next step would be to analyze traditional low-risk investments like certificates of deposits (CDs), Municipal Bonds, Corporate Bonds and other fixed-income products. The problem is that all those investments offer low yields simply because they are dependent on interest rates.

Traditional fixed-income investments lately are like putting money under your mattress. They’re not even investments anymore — they are places to park your money. These instruments remain safe and low risk, but unfortunately offer minuscule returns in the current environment. There is a joke on Wall Street about the current situation with interest rates: Risk-free return has become a return-free risk.

While the traditional fixed-income investments offer historically low returns, let’s examine other alternatives based on the current environment. The first step in this process is to analyze other asset classes and prevailing economic trends.

The Federal Reserve and the U.S. Treasury provide support (printing money) to stabilize the markets and aid people and businesses most affected by COVID-19. This trend will most likely continue. The unprecedented supply of money represents a “reinflationary environment.”

Equities

Equities have been a beneficiary of the money supply. While this is economically natural for the stock market to advance based on such substantial support, equities' current levels and valuations have become stretched. It certainly does not mean that the stock market will decline. It simply means that now stocks represent a higher risk than their historical average.

The reinflation environment makes the following asset classes and economic sectors more attractive and less risky.

Real Estate Investment Trusts (REITs)

REITs are funds that hold real estate in their portfolios. They invest in commercial real estate, apartment complexes, industrial properties, shopping malls, land, office buildings and numerous other real estate properties.

REITs are traded like stocks and are also available through mutual funds and exchange-traded funds.

Real estate, in general, is one of the first beneficiaries of inflation. Properties rise in price because they are tangible assets. Even during the deflationary environment over the last 40 years, long-term REIT investments compared favorably to other asset classes like equities and fixed income.

REIT returns are tied directly to sectors and regions they participate in. It is prudent to consider current trends, which may affect future returns of those trusts. The latest trend of people working from home may negatively affect REITs that invest in office buildings, and online commerce expansion may make it challenging for REITs that invest in malls and shopping centers.

Here are some of the most popular sectors REITs invest in:

• Retail
• Industrial
• Lodging
• Residential
• Healthcare
• Self-storage
• Infrastructure

Investing in healthcare and residential REITs may represent better opportunities today due to the aging population and improving economic conditions compared to retail and office REITs.

Banks and Financial Stocks

While the stock market is currently overvalued by most measures like price-to-earnings (P/E), debt and price-to-book, some sectors of the market remain reasonably priced and are expected to benefit from the inflationary trends and higher interest rates.

The stock market's financial sector includes companies that are engaged in businesses such as banking, brokerage, mortgage finance and insurance. They are sensitive to changes in the economy, monetary policy and regulatory policy. The sector tends to perform better at the beginning of the economic cycle.

Here’s how some of the financial sector stocks compare to the overall market today based on the forward P/E ratio:

• Money center banks: 13.25
• Regional banks: 12.90
• Brokerage and investment banks: 14.40
• Investment and asset management: 15.50
• S&P 500 index: 22.60

As you can see, the financial sector is trading at a significant discount to the overall market, which is attractive.

Needless to say, stocks can be volatile, and the financial sector is no exception. If the market corrects, financial stocks will most likely decline as well. But the combination of favorable relative valuations and the reinflation environment boosted by the Federal Reserve and U.S. Treasury makes it a safer investment.

Utilities

Utility companies provide electricity, water, sewage, natural gas, waste management or a mix of these services. The stability of the utilities industry is that basic comfort consumer services will always be in demand.

The utilities sector of the stock market has always represented stability. Utilities are much less volatile than other sectors of the stock market and considered to be a safe sector. While this sector is correlated to the stock market, it’s provided a hedge against overall stock market volatility during corrections and bear markets.

Here is the chart of Utilities sector ETF (XLU) over the last 20 years:

This industry is highly regulated, which makes cash flow of those companies predictable. Utility companies pay the highest dividends. In most cases, utilities stocks' dividends are much higher than the yield offered by other fixed-income products discussed.

High dividend-paying stocks have become great income investments. In the current low-interest rate environment, investors are starving for yield. Having stable, low volatility, high dividend-paying stocks in your portfolio is an attractive proposition.

Other than investing in utilities stocks — a natural way to go if you are experienced — you can consider exchange-traded funds (ETFs) that specialize in different sectors and industries. They provide direct exposure to companies in particular sectors.

Real Estate Select Sector SPDR Fund (XLRE): XLRE tracks the Real Estate Sector Index of the S&P 500. It offers an annual dividend yield of 3.22% and an expense ratio of only 0.13%.

Select Sector Financial SPDR ETF (XLF): XLF tracks the Financial sector of the S&P 500. It offers an annual dividend yield of 1.97% and an expense ratio of 0.13%.

Utilities Select Sector SPDR ETF (XLU): XLU tracks the Utilities sector of the S&P 500. It offers an annual dividend yield of 3.15% and an expense ratio of 0.13%.

Gold and Silver

Gold and silver are popular investment vehicles that are also relatively safe. Both gold and silver are seen as solid places to hedge against inflation, and they tend to recover their value quickly when the economy turns around.

Additionally, gold and silver can be found throughout the markets as they are often tied to ETFs, mutual funds and various stocks. Speak to your broker if you want to invest in the price of gold or silver. If not, you might also choose from a variety of precious metal investments like:

SPDR Gold MiniShares Trust (ARCA: GLDM) This particular trust tracks prices from the London Gold Bullion Association.

Aberdeen Standard Physical Gold Shares ETF (ARCA: SGOL) The sole holding of this ETF is gold bullion held in London and Zurich. It tracks the spot price of gold while aiming to reduce investor fees.

Granite Shares Gold Trust (ARCA: BAR) This grantor trust aims to track the spot price of gold while reducing fees and expenses.

iShares Silver Trust (ARCA: SLV) The iShares Silver Trust tracks the spot price of silver. With fewer expenses and liabilities, it uses silver bullion held in London.

Global X Silver Miners ETF (ARCA: SIL) The Global X Silver Miners ETF actively tracks a market-capped index of companies that are engaged in the silver mining sector.

Best Investment Advisors

If you are interested in low-risk investments, the best course of action is to speak with a financial advisor. Tell them your long-term goals, investment experience and objectives, and what your income and capital appreciation expectations are. An experienced advisor should be able to find the right mix of investment products that will be right for you. 

Best Low-Risk Investments Represent Stability and Predictability

While low-risk investments usually do not offer high returns, a balanced approach of fixed-income products mixed with lower-risk equity exposure instruments should yield the desired results over the long term. Low-risk investment does not mean risk-free. Concentrate on what your goals are and what you’re comfortable with.