Bond Alternatives May Be a Good Idea Right About Now
Originally published: August 5, 2022
Updated: August 17, 2026
Most people think bonds are safe, but in today’s challenging climate, they are not. Interest rates rose sharply from 2022 through 2023, and the Federal Reserve began cutting rates in September 2024; as of August 2026 the federal funds rate sits around 3.6%, with the 10-year Treasury yielding about 4.68%. Investors seeking a measure of safety along with the possibility of a return have a few choice alternatives to consider instead.
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. Bond yields climbed substantially during the 2022–2023 rate-hiking cycle and remain well above the near-zero levels of the early 2020s, even as the Fed has begun trimming rates — a shift that continues to prompt some investors to reassess their bond holdings. 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 hadn’t seen one for 30-plus years — until 2022’s sharp bond sell-off. We had steadily declining interest rates from the mid-1980s until that point. Bond prices move in the opposite direction of interest rates. If interest rates rise, bond prices fall, and vice versa. The Federal Reserve raised interest rates in 2022 and continued hiking through 2023 to combat inflation, before beginning to cut rates in September 2024; as of August 2026 the federal funds rate stands around 3.6%, meaningfully lower than its recent peak but still well above pre-2022 levels. That shift means the climate for long-term bond prices looks different than it did when this article was first published in 2022, and older, lower-yielding bonds purchased during the near-zero-rate years may still be trading below par even as newly issued bonds pay considerably more.
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, as 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:
Fixed annuities and fixed index annuities
Fixed annuities, sold by insurance companies, offer long-term tax-deferred cash value accumulation and monthly income for life. They involve an upfront payment by the owner, will grow annually at a fixed rate, and can provide either a lump sum pay out to the policy owner at the end of the policy term or a series of guaranteed income distributions from the insurance company. The insurer guarantees the owner the fixed interest rate on their premium payments for a specific period of time. The value of the owner’s principal will grow based on interest applied each year.
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 your hero!), and it will have a participation rate on the upside. So as an example, if we have an 80% participation rate and the S&P 500 is up 10%, then 8% would be credited to your account on your anniversary date and that new value is locked in and won’t drop below that value because of a market decline. In other words, your principal and your interest growth are protected each and every year.
We at Summerlin Benefits Consulting help our clients use fixed and fixed index annuities as “safe money strategies” because of the manner in which they can help reduce risk by protecting consumers’ cash values and interest growth against down markets, while still achieving a reasonable rate of return over time.
Annuities can also generate more income than bonds of similar maturity purchased at the same time. And because annuities aren’t priced daily in an open market as bonds are, they can be 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 historically having been 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.
| Investment Type | Principal Protection | Income / Return Potential | Liquidity | Key Consideration |
|---|---|---|---|---|
| Fixed Index Annuities (FIA) | Principal protected against market decline (subject to any applicable withdrawal charges) | Interest credited based on index performance, up to a stated participation rate or cap | Limited — early withdrawals may incur surrender charges | Best suited for money not needed for 7-10+ years |
| Immediate Income Annuities | Guaranteed income stream backed by the issuing insurance company | Fixed income payments; not market-linked growth | Very limited — funds are converted into an income stream | Best suited for retirees wanting predictable lifetime income |
| Multi-Year Guarantee Annuities (MYGA) | Principal protected with a fixed, guaranteed interest rate for a set term | Fixed, known interest rate for the guarantee period | Limited during the guarantee period; surrender charges may apply | Functions similarly to a CD, but issued by an insurance company |
| Buffered / Defined-Outcome ETFs | Losses limited to a set percentage (e.g., 9%-30%) over a 12-month outcome period | Gains typically capped (e.g., 10%-20%) over the same period | Generally liquid — trades on an exchange like a stock or ETF | Buffer/cap terms reset only at the start of each new outcome period |
| Real Estate Investment Trusts (REITs) | No principal protection — share price fluctuates with the market | Dividend income (REITs must distribute at least 90% of taxable income) plus potential price appreciation | Varies — publicly traded REITs are generally liquid; non-traded REITs may not be | Dividend yields vary widely by REIT and sector |
Real estate investment trusts
This is the best-known bond alternative, created in the 1960s to provide investors with 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 are required to distribute at least 90% of their taxable income to shareholders each year.
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. As of early 2026, publicly traded equity REITs averaged about a 3.98% dividend yield, with sector yields ranging from roughly 3.36% up to 5.47%, and some higher-yielding or non-traded REITs paying more. Be careful though – many REITs are not liquid if you need access to your money in the short term. If you are looking for a strategy that allows you to have access to your money, fixed index annuities may be the better route to go.
| Metric | Value | As Of | Source |
|---|---|---|---|
| Federal Funds Effective Rate | 3.63% | August 13, 2026 | Federal Reserve H.15, https://www.federalreserve.gov/releases/h15/ |
| 10-Year Treasury Yield | 4.68% | August 14, 2026 | Advisor Perspectives Treasury Yields Snapshot, https://www.advisorperspectives.com/dshort/updates/2026/07/31/treasury-yields-snapshot-july-31-2026 |
| 2-Year Treasury Yield | 4.17% | August 14, 2026 | Advisor Perspectives Treasury Yields Snapshot, https://www.advisorperspectives.com/dshort/updates/2026/07/31/treasury-yields-snapshot-july-31-2026 |
| Average Publicly Traded Equity REIT Dividend Yield | 3.98% | April 2, 2026 | Commercial Property Executive, https://www.commercialsearch.com/news/2026-reit-dividend-yields/ |
| Fed Rate-Cutting Cycle Began | September 2024 | N/A | Advisor Perspectives Treasury Yields Snapshot, https://www.advisorperspectives.com/dshort/updates/2026/07/31/treasury-yields-snapshot-july-31-2026 |
Alternatives to bonds do offer higher yield potential. But remember – that comes with risk. It’s wise to work with a financial professional to go over your options as you assess your portfolio, differentiate between safe and risky assets, and help you structure your portfolio in a way that makes the most sense for you. We at Summerlin Benefits do this day in and day out with our clients. Call us today and we’d be happy to go over your options with you!
Important Tax and Legal Information
Note: This content is for informational purposes only and does not constitute tax or legal advice. Summerlin Benefits Consulting does not provide social security, specific advice related to taxes, or legal advice. Consult a tax/legal professional for guidance with your individual situation.
Important Retirement Planning Information
Every retirement strategy is unique, and not all annuity products offer the same features, guarantees, or level of protection. References in this article apply only to the specific retirement solutions discussed and should not be interpreted as applying to all annuities. The right strategy depends on your individual goals, financial situation, and retirement objectives. This is something Summerlin Benefits Consulting can help you determine.
Frequently Asked Questions
Q: What are some favorable alternatives to bonds when interest rates are elevated?
A: Fixed Index Annuities (FIA), buffered ETFs, and REITs are common bond alternatives. Each offers a different risk and return profile: FIAs protect principal with growth tied to a market index, buffered ETFs limit downside within a set range, and REITs offer real estate-linked dividend income.
Q: How does a Fixed Index Annuity protect my principal?
A: A Fixed Index Annuity (FIA) protects principal by crediting interest based on an index’s performance, such as the S&P 500, up to a set participation rate, and the value won’t drop due to market declines. For example, an 80% participation rate on a 10% index gain credits 8% interest, locked in annually.
Q: What is a buffered ETF and how does it limit investment losses?
A: A buffered or defined-outcome ETF limits an investor’s losses to a set percentage (commonly 9%–30%) over a 12-month period, in exchange for capping potential gains, often at 10%–20%. Most are linked to the S&P 500 Index and use FLEX options to set these terms.
Q: What dividend yield can I expect from REITs today?
A: As of early 2026, publicly traded equity REITs averaged about a 3.98% dividend yield, with sector yields ranging from roughly 3.36% to 5.47% (Commercial Property Executive, 2026). REITs must distribute at least 90% of taxable income to shareholders annually, though yields vary and liquidity can be limited short-term.
Q: Why are bonds considered riskier when interest rates change?
A: Bond prices move opposite to interest rates, so rising rates push bond prices down. Bond mutual funds compound this risk because, unlike individual bonds, they have no fixed maturity date, leaving investors without a set point in time when they’re assured of getting their original principal back.
