The stock market has been on a roller coaster ride for the past five years. It crashed at the outset of Covid, only to immediately make a U-turn and rage higher. Then it crashed again in 2022 only to begin again on what is a remarkable two year long bull market.
That’s the kind of volatility that can drive someone out of the stock market. The ups and downs, quick changes of pace and direction, can make it all too confusing and stomach-churning. Instead, they head to the distinctly calmer bond markets, where a steady hand on the tiller churns out regular income streams.
If you have $40,000 to invest today, should you put it all in the Vanguard Corporate Bond ETF (NASDAQ:VCIT) and its relaxing revenue streams, or should you throw it into the hurly burly of the SPDR S&P 500 ETF Trust (NYSEARCA:SPY | SPY Price Prediction) and bet on the long-term growth of the stock market?
Each has its own charm and risks, so let’s see what would be better.
Vanguard Total Corporate Bond ETF (VCIT)
The Vanguard Total Corporate Bond ETF invests in a broad range of corporate bonds, aiming to provide investors with a steady income. Bonds are essentially loans given to companies, and in return, they pay you interest.
The beauty of VCIT is its focus on diversification. It spreads your money across many different bonds, reducing the risk that one company’s failure could sink your investment. This ETF offers a lower risk compared to stocks because bonds typically fluctuate less in value.
However, this safety comes with a trade-off. The returns are generally lower than what you might get from stocks. Think of it as getting a reliable, but modest, paycheck. In times of economic uncertainty or when interest rates rise, bond values can decrease, but the income from interest can still be a comforting buffer.
SPDR S&P 500 ETF Trust (SPY)
As its name implies, the SPDR S&P 500 ETF Trust tracks the S&P 500, which includes 500 of the largest companies in the U.S., covering various industries. Here, you are also getting diversification as your money would be spread across these giants, from tech to healthcare, promising potentially higher returns over time. Historically, stocks have outpaced bonds in growth.
The S&P 500 has shown an average annual return of around 10% over the long term, but remember, this ride comes with ups and downs. Economic downturns, market corrections, or broader global events can cause significant dips. The volatility means your investment could be worth more or less than $40,000 at any given moment, but patience often rewards those who can stay the course.
The verdict
Which is the smarter choice? While it really depends on your personal situation, if you have a long enough investment horizon the SPDR S&P 500 ETF Trust is the better bet.
In a 2020 study, Deutsche Bank published data showing that over the past 100 years, equities beat out bonds globally by 4.5% on average. Between 1920 and 2020, the exchange-traded fund beat 10-year and 30-year government bonds by 4.5% per year, and corporate bonds by 3.7% annually.
The study also noted that going as far back as 1800 — we’re pretty much talking about standing under the buttonwood tree in New York and starting the New York Stock Exchange — there have been only two decades where stocks had negative returns: the 1930s during the Great Depression, and the 2000s and the so-called “lost decade.”
Yet personal considerations can’t be ignored. If you’re looking for stability, perhaps preparing for a near-term expense or simply not wanting to lose sleep over market swings, the bond ETF might be your go-to.
Ultimately, a blend of both might serve you best. This approach can offer a balance of growth potential from stocks with the steadiness of bonds. But remember, past performance isn’t a crystal ball for future results. Your decision should align with your financial goals, risk tolerance, and investment timeline.
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