A buffet for bond investors.
While many think investing primarily involves the stock market, it’s important to remember the bond market is significantly larger. The total value of U.S. stocks is a bit more than $30 trillion, while the bond market is about $43 trillion. Bonds essentially are loans, either to governments or corporations, and investors are repaid their money with interest over time. Anyone at or near retirement should understand the appeal of bonds as part of a fixed-income portfolio designed to deliver regular paychecks. Relying on income is one of the most powerful ways to protect your nest egg and help meet retirement needs. Here are seven top exchange-traded funds with different income strategies to consider.
iShares iBoxx Investment Grade Corporate Bond ETF (ticker: LQD)
With more than 2,000 high-quality bonds from top names including JPMorgan Chase & Co. (JPM) and Comcast Corp. (CMCSA), the LQD ETF is a logical starting point for fixed-income investors — and with nearly $35 billion in assets, it’s a popular one, too. Although the holdings are deep, the bias of this ETF is toward banking stocks, with roughly 26% of the portfolio in this sector. That’s a hazard for many investment grade bond funds, since financials are among the most frequent users of the bond market to raise capital. That’s something to be aware of if you want to watch your exposure to banks.
Current yield: 3.3%
SPDR Portfolio Short Term Corporate Bond ETF (SPSB)
With uncertainty around interest rates as well as global economic growth, some investors may be more concerned with protecting their capital than generating income. An alternative corporate bond ETF with a lower risk profile, then, is the SPSB fund. The maturity of its holdings is shorter, limited to debt that matures in three years or less to firms like tech giant Oracle Corp. (ORCL) and financial giant Goldman Sachs Group (GS). A lot can happen to even these currently stable companies in 10 or 20 years, but investors can be very confident that these short-term bonds will be paid back in full. There’s less interest on these loans, but more certainty.
Current yield: 2.8%
iShares 1-3 Year Treasury Bond ETF (SHY)
If you really want to be low-risk with your fixed-income portfolio, then look to this short-term bond fund that is one of the best Treasury ETFs. Not only is the U.S. government the most bulletproof borrower, the fact that these bonds mature in three years or less means it is pretty much a sure thing investors are going to get paid. On the flip side, that also means there’s not much of a risk premium here so the yield is more modest. However, fixed-income portfolios are as much about capital preservation and certainty as they are about generating a regular payday — and SHY has certainty in spades.
Current yield: 2.1%
SPDR Bloomberg Barclays High Yield Bond ETF (JNK)
The go-to vehicle for high-yield or junk bonds, JNK, commands about $10 billion in total assets focused on bonds from companies with less-than-stellar credit. There’s more risk in these businesses that include airplane parts manufacturer TransDigm Group (TDG) and small-cap hospital operator Community Health Systems (CYH). But the bonds offer a higher rate of return as a result. JNK is an attractive investment if you are willing to be more aggressive in your hunt for fixed income. The fund does its best to mitigate potential default losses through wide diversification among more than 920 holdings.
Current yield: 5.6%
Pimco 0-5 Year High Yield Corporate Bond ETF (HYS)
This fund is a way to split the difference and go for the higher return of junk bonds but the lower risk profile inherent with shorter maturities. HYS is built with high-yield corporate loans but only those that come due in five years or less. The fees here are a bit higher than your typical index fund at 0.56%, or $56 annually on every $10,000 invested. However, this is one area where a good manager can make a big difference — and it’s still relatively cheap considering you get a sophisticated strategy and a diverse portfolio that includes a small slice of the international bond market.
Current yield: 5%
Invesco International Corporate Bond ETF (PICB)
While the bonds issued by U.S. corporations and government entities are sought-after instruments, they aren’t the only option for income investors. This Invesco fund offers a diversified way to invest in international corporate bonds. These are firms just as entrenched as U.S. blue-chip stocks, including U.K. financial giant Lloyd’s Banking Group (LYG) and pharma powerhouse GlaxoSmithKline (GSK). With a portfolio of more than 430 individual bonds, this is a great way to add some geographic diversification to your portfolio. It’s worth noting, however, that lower interest rates overseas means a drop-off in total yield from these bonds.
Current yield: 1.5%
iShares Core U.S. Aggregate Bond ETF (AGG)
If you can’t decide how to balance yield and risk, consider AGG — one of the 10 largest ETFs on Wall Street and one of the most popular fixed-income options. This fund offers broad exposure to U.S. investment-grade bonds, including Treasury bonds, agency mortgage debt from government-backed entities like Fannie Mae and Freddie Mac and corporate bonds from highly-rated firms like Bank of America Corp. (BAC). There is built-in diversification and a focus on lower risk. AGG also offers a scale and liquidity that appeals to investors as the fund boasts almost $67 billion in assets and regularly trades north of 3 million shares each day.
Current yield: 2.7%
The best bond ETFs to buy now:
— iShares iBoxx Investment Grade Corporate Bond ETF (LQD)
— SPDR Portfolio Short Term Corporate Bond ETF (SPSB)
— iShares 1-3 Year Treasury Bond ETF (SHY)
— SPDR Bloomberg Barclays High Yield Bond ETF (JNK)
— Pimco 0-5 Year High Yield Corporate Bond ETF (HYS)
— Invesco International Corporate Bond ETF (PICB)
— iShares Core U.S. Aggregate Bond ETF (AGG)
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Update 08/05/20: This story was published at an earlier date and has been updated with new information.