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Although yields are low, fixed income ETF investing can still be a valuable part of an investor’s portfolio. Securities in this space still have low levels of correlation to broad equity markets and are often less volatile as well.
This could be especially important if Europe descends into anarchy again or if the American economy has trouble keeping up its modest momentum. Furthermore, although interest rate risk is certainly an issue, the current investment climate and the policies of the Federal Reserve suggest that we could be a long way off from seeing a boost in rates.
As a result, some investors may still want to cycle into bond ETFs at this time. However, there are a host of choices that are available to investors targeting nearly every sector of the market; in fact, over 150 products currently occupy the space.
Yet, for those who are new to the bond ETF market a look at some of the most popular products could be a great first step. For these investors, we have briefly highlighted seven of the most popular bond ETFs on the market today, any of which could help investors better diversify their portfolios and smooth volatility over the short-term:
Barclays TIPS Bond Fund (TIP)
To play the largest fund in the bond universe, investors may bet on iShares’ TIP which has total assets of $22.2 billion. The fund tracks the price and performance of the Barclays Capital U.S. Treasury Inflation Protected Securities (TIPS) Index, before fees and expenses.
The index is a market capitalization weighted benchmark including all the U.S. Treasury inflation-protected securities that are rated investment grade having at least 1 year remaining to maturity with face value of minimum $250 million. (Read: Can You Fight Inflation With This Real Return ETF?)
The product holds 35 securities in total and charges investors 20 basis points in fees. With an annual distribution yield of about 3.25% and average yield to maturity of 1.74%, the fund is entirely focused on government debt and is generally AAA rated by Moody’s and AA+ by S&P.
In fact, the medium-term bonds comprise a group of holdings at 69% of the total, giving the fund an effective duration of about 5.41 years. Launched in December 2003, the product has delivered healthy returns of 13.40% last year and 1.05% in the first three months of this year.
iBoxx $ Investment Grade Corporate Bond (LQD)
Initiated in July 2002 by iShares, the fund seeks to match the price and yield performance of the iBoxx $ Liquid Investment Grade Index, before fees and expenses. The index is a rules-based benchmark and invests in U.S. liquid investment grade corporate bonds. The fund holds 783 securities with 5% concentrated in top 10 corporate bonds, including AT&T notes due in 2018, Wells Fargo notes due in 2017, and Wal-Mart notes due in 2037.
The product is tilted towards the mid-to-high quality securities as bonds in the BBB+ to BBB- range make up just 30% of the total while financial securities make up the top sector. With total assets of $19.8 billion, the fund has an effective duration of 7.47 years and charges investors a low fee of 15 bps a year.
In addition, it has an annual distribution yield of about 4.09% and average yield to maturity of 3.65%. The product has delivered healthy returns of 8.89% last year and 0.59% in the first three months of this year. (Read: Top Three High Yield Junk Bond ETFs)
Total Bond Market ETF (BND)
Another exciting option available for broad exposure in the space is Vanguard’s BND, holding 5,086 bonds. The fund uses a passive approach and tracks the performance of the Barclays Capital U.S. Aggregate Float Adjusted Index. With total assets of $15.3 billion, the product consists largely of government Treasury bonds followed by mortgage-backed and asset-backed securities, and finally corporate bonds.
A large part of the fund is geared towards 10 years maturity notes, which makes up about 86% of the assets on a combined basis. The average maturity is 7.2 years and average duration is 5.1 years, suggesting modest duration risk. However, the fund does charge a low fee of 11 bps per year and generates an annual return of 7.80% in one-year period (as of March 31, 2012). (Read: Three Bond ETFs For A Fixed Income Bear Market)
Barclays Aggregate Bond (AGG)
Launched in September 2003 by iShares, the fund seeks to match the performance of the Barclays Capital U.S. Aggregate Bond Index. Treasury bonds take the top spot in the basket of securities followed by the mortgage pass-through notes, asset-backed securities, and corporate bonds. The notes are fixed rate, non-convertible, and taxable having the remaining maturity of at least one year. With total holdings of 1,441, the average yield to maturity and average duration of the fund are 1.78% and 4.37 years, respectively. (Read: Sterilization- QE 3 With Another "Twist"?)
The fund has total assets of $14.7 billion and charges investors a fee of 22 bps. The risk is more concentrated to the ‘A’ rated and above notes with roughly 85% of its assets. The product yields 2.62% dividends per annum and generated good annual returns of 7.58% in 2011.
iBoxx $ High Yield Corporate Bond Fund (HYG)
The fund, issued by iShares in April 2007, seeks to match the performance of the iBoxx $ Liquid High Yield Index, before fees and expenses. The product holds 504 junk bonds with heavy focus on short and intermediate term corporates.
The average yield to maturity is 6.89% and the effective duration is 4.26 years. Consumer service, financials, and telecom constitutes a large part of the fund’s assets with Blackrock notes on top, followed by First Data notes due in 2021, and Sprint Nextel’s notes due in 2018. (Read: U.S. Telecom ETFs: Opportunities and Threats)
The fund charges investors 50 basis points a year in fees and has total assets of $14.5 billion. HYG delivers a massive dividend of 7.17% per annum and excellent annual returns of 5.89% and 1.01% last year and year-to-date, respectively.
SPDR Barclays Capital High Yield Bond ETF (JNK)
For another option in the junk bond ETF space, investors have the ultra popular JNK. With assets of $12 billion under its management, the fund tracks the overall performance of the Barclays Capital High Yield Very Liquid Index, which includes fixed-rate, taxable, low rated corporate bonds usually ‘BBB’ and below. The individual bond is having more than $600 million in face value and remaining maturity of at least one year.
With lower fees of 40 bps per year, the fund is heavily exposed to industrial sector and holds around 226 bonds in its basket. It provides attractive dividend yield of 7.38% like other high yield junk bond ETFs. The fund has generated annual returns of 6.66% in 2011 and 1.98% year-to-date. (Read: Top Three High Yield Junk Bond ETFs)
Barclays 1-3 Year Treasury Bond (SHY)
For investors looking to play short-term bonds, iShares’ SHY seems to be intriguing option in the space with AUM of $10.2 billion. The fund seeks to replicate the performance of 61 Treasury bonds having maturities remaining between 1-3 years and a minimum $250 million in face value as depicted by the Barclays Capital U.S. 1-3 Year Treasury Bond Index. This results in a product that has virtually no credit or interest rate risk, although yields are extremely low for this fund
Still, SHY charge investors a low fee of 15 bps a year and has an average yield to maturity of 0.36% with the effective duration being 1.92 years. The product has delivered unimpressive annual returns of 1.43% last year and yields 0.42% dividend per annum. Since the start of the year, the product is not doing as well as some of its counterparts, as it has lost 0.3% in year-to-date terms, however, safety should be the goal with this fund as opposed to capital gains (Read: Go Local With Emerging Market Bond ETFs).
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