These ETFs make buying bonds a snap.
Fixed income doesn’t rank high on the financial media’s list of investments to cover, considering the alternative is a stream of exciting rumors from Apple (ticker: AAPL) or the latest vomit-inducing outbreak from Chipotle Mexican Grill (CMG). But bonds play a vital role in diversifying regular and retirement portfolios to protect against a downturn in stocks, and providing much-needed income payments that investors can rely on. Buying individual bonds can range from difficult to virtually impossible depending on the type, though, which is why fixed-income funds are a much more realistic solution.
iShares Core U.S. Aggregate Bond ETF (AGG)
iShares’ AGG is one of the simplest ways to get broad-based fixed-income exposure. This fund, as the name suggests, tracks the Barclays U.S. Aggregate Index — the benchmark against which a great many bond funds are compared. This fund provides a mix of U.S. Treasurys (38 percent), mortgage-backed securities (30 percent), investment-grade corporate (26 percent) and other bonds with varying maturities, resulting in a modest yield of 2.25 percent. Also, a 1-basis-point fee waiver, while tiny, does serve its purpose of putting its expenses on par with competitor Vanguard Total Bond Market ETF (BND).
SEC yield: 2.25 percent
Expenses: 0.05 percent (includes 1-basis-point fee waiver)
iShares 1-3 Year Treasury Bond ETF (SHY)
One of the allures of U.S. Treasurys is that they’re among the most secure bonds in the world, typically drawing high demand from domestic and international investors alike. If you’re looking to double down on safety, you should consider iShares’ SHY, which invests in U.S. debt with remaining maturities of one to three years. Shorter-term bonds are less sensitive to interest-rate changes, and thus carry less risk. The flip side? Because their risk profile is so attractive, the government can offer much lower coupon rates, hence a monthly yield of around 1.2 percent. Compare that with a 10-year T-note, which yields roughly 2.3 percent currently.
SEC yield: 1.24 percent
Expenses: 0.15 percent
Vanguard Intermediate-Term Corporate Bond ETF (VCIT)
The VCIT is a more aggressive play than SHY on two fronts. One, it buys investment-grade debt from U.S.-listed companies such as Anheuser Busch Inbev NV (BUD) and Verizon Communications (VZ), which isn’t terribly high on the risk scale, but admittedly not as much of a lock as American government debt. Also, these bonds have more moderate remaining maturities of between five and 10 years, which means there’s inherently more interest-rate risk. But there is a payoff: VCIT offers more than double the projected income of SHY, and with a risk profile that most investors can still get behind.
SEC yield: 3.15 percent
Expenses: 0.07 percent
SPDR Bloomberg Barclays High Yield Bond ETF (JNK)
This next choice is perfect for risk-tolerant market participants — especially those with longer investing horizons — who are fine taking a bit of a gamble in the search for high yield. The JNK is a collection of about 960 bonds that, among Moody’s, Standard & Poor’s and Fitch, are rated “junk,” which means they have a higher default risk than investment-grade bonds. However, because there’s a much more real probability that a junk bond won’t be paid back, they tend to pay outstanding yields — in this case, north of 5 percent. And holding them en masse via an ETF significantly increases your protection against one or two defaults.
SEC yield: 5.03 percent
Expenses: 0.4 percent
VanEck Vectors Fallen Angel High Yield Bond ETF (ANGL)
The ANGL represents what might be the sweetest middle ground in bonds, at least for more aggressive investors. “Fallen angels” are bonds that were issued as investment grade but have snuck down into junk status. As a result, the majority (77 percent) of the ANGL’s 236 holdings still are in the top tier (BB) of junk-grade status, compared to just 44 percent for JNK. In other words, most of the fund’s debt, while technically not investment grade, is at least the safest “junk” you can buy. And you still get a nearly 5 percent yield on your investment today. Not too shabby.
SEC yield: 4.99 percent
Expenses: 0.35 percent (includes 30-basis-point fee waiver)
VanEck Vectors High-Yield Municipal Index ETF (HYD)
Municipal bonds are like Treasurys in that they’re government debt, but these are issued by states, counties, cities and other municipalities. Because munis (like corporates) aren’t as secure as Treasurys, they tend to yield more than their big-brother counterparts. But they also offer more income than their headline yields indicate, because they’re exempt from federal taxes (and sometimes city and state taxes). HYD is a collection of roughly 1,500 such bonds from states including California, Illinois and New York, and its good headline yield of 4.13 percent translates into a great tax-equivalent yield of 6.8 percent.
SEC yield: 4.13 percent
Expenses: 0.35 percent
Vanguard Total International Bond ETF (BNDX)
International diversification can help counter weak spells in American bonds. BNDX offers this in spades, with just less than 4,500 debt issues across nearly 100 countries on six continents. More than a quarter of the fund is invested in the sovereign debt of countries with AAA-rated bonds — the highest possible rating, and one step better than America’s AA+. The biggest slice of the BNDX asset pie, meanwhile, goes to Japan’s still-investment-grade A+, at 26 percent. The only disadvantage is a low sub-1 percent yield, but if you’re looking for a bunker to hide in, it’s far better than a savings account.
SEC yield: 0.79 percent
Expenses: 0.12 percent
PowerShares Emerging Markets Sovereign Debt Portfolio (PCY)
The place to look internationally for higher yields is in emerging markets, where issues such as less established economies, geopolitical uncertainty and greater risk for corruption make sovereign debt look, well, not as pristine as bonds from the U.S. and other developed nations. But again, investing in an ETF reduces single-holding risk. PCY invests in 83 different issues, and country balance is excellent, with Mexico and Brazil the two largest holdings at just 3.7 percent and 3.6 percent each, respectively. Meanwhile, you get to enjoy an elevated yield near 5 percent.
SEC yield: 4.94 percent
Expenses: 0.5 percent
VanEck Vectors Emerging Markets High Yield Bond ETF (HYEM)
You can take the emerging market theme further by investing in not just emerging market corporate debt, but EM corporate junk debt via the HYEM. This ETF invests in a broader basket of 355 holdings and also is more heavily weighted toward more established emerging markets such as China, Brazil and Russia. And while this is a junk fund, roughly 60 percent of its holdings are in the highest junk tier (BB). HYEM also is similar to many EM equity funds in that its industry weights are skewed heavily toward financials (40 percent) and energy (17 percent).
SEC yield: 5.77 percent
Expenses: 0.4 percent (includes 10-basis-point fee waiver)
Direxion Daily 20+ Year Treasury Bull and Bear 3x Shares (TMF/TMV)
Last up are a pair of the most aggressive bets you can make on bonds: triple-leveraged funds. TMF and TMV are both tethered to a bond index that tracks Treasurys with maturities of 20 years or more — the highest-volatility U.S. government bonds you can invest in. The bull fund TMF provides three times the daily return of this index, meaning for every 1 percent the index gains, TMF gains 3 percent. TMV provides the inverse of that, gaining 3 percent for every 1 percent daily move in the index. These are among the riskiest funds you can buy, and an area only meant for agile traders.
SEC yield: Variable
Expenses: 1.08 percent TMF, 1.05 percent TMV
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11 of the Best Fixed-Income Funds to Buy originally appeared on usnews.com
