As American Treasury rates have continued to fall thanks to European issues and a sputtering economy, the ripple effect has been felt throughout the fixed income world. Savers have been punished with ultra-low rates while mortgages are at historic lows and corporations are able to borrow at equally depressed levels.
In fact, recent moves in the bond issuance market further underscore the drastic situation for many investors. Unilever recently sold over half a billion in five year bonds with a coupon of just 0.85% while Texas Instruments unveiled bonds on three year debt that had a coupon of just 0.45% (see Is The Bear Market for Bond ETFs Finally Here?).
As a comparison to U.S. Treasury securities, the yield differential is pretty low across the board. For the three year issuance, it was just 16 basis points while the five year corporate note is only yielding 26 basis points more than its U.S. Treasury bond counterpart.
This seems like a paltry premium for investors to receive over U.S. Treasury bonds considering that the American government has the power of taxation and the Fed has the ability to print money indefinitely in order to prevent a default.
Any of the companies obtaining these ultra low yields have none of these advantages but are still yielding next to nothing, forcing many investors to look to other avenues in order to boost current incomes back to tolerable levels while still staying in the short end of the curve (see Floating Rate Bond ETF Investing 101).
Luckily for investors who are struggling in this corner of the market, there are a number of ETF choices which aren’t too risky from a duration perspective but offer up much more reasonable yields. Below, we highlight three of these bond ETFs which could offer up much more respectable payouts in today’s low rate environment:
iShares S&P/Citigroup 1-3 International Treasury Bond Fund
For investors looking for broad bond exposure outside of the U.S. market, ISHG could be an intriguing pick. The fund is heavily tilted towards sovereign bonds in Europe, although Japanese securities do account for the single biggest weighting at just under one-fourth of the total.
Nearly all of the fund’s holdings are rated investment grade, although it does have an 11% allocation to high yield which helps to boost income. In terms of duration risk, the effective duration is just under 1.8 years while the weighted average maturity comes in at a similar figure (see The Guide to International Treasury Bond ETF Investing).
Despite this, the fund’s 12 month yield is a robust 4.5%, handily beating out comparable corporate and U.S. government securities. However, the yield—and the total return of the fund—has come down significantly in recent months pushing the 30 Day SEC yield to just under 90 basis points.
Given this trend, the fund may not be the solid yield destination that it once was, although it still offers a payout far superior to similar products that have three years to maturity. Furthermore, the fund charges just 35 basis points a year in fees suggesting that it will be a low expense ratio choice in the segment as well.
WisdomTree Australia & New Zealand Debt Fund
If you are looking for a more targeted approach that can potentially offer a higher yield, AUNZ could be another choice in the international bond market. The fund tracks securities issued by institutions based in Australia or New Zealand, holding assets that are denominated in either of the currencies in these two nations.
The effective duration for this fund comes in at a modest 3.7 years although the 30-Day SEC yield is a very solid 2.7%. This is possible largely due to the relatively high interest rates that both Australia and New Zealand currently have, a situation that helps ensure bonds issued in these currencies have more reasonable payouts than many of their Western peers (see Top Three High Yield Financial ETFs).
In total, the fund holds 60 securities in its basket and it has a heavy weighting on Australian securities. New Zealand accounts for just under 12% of the total, while securities from the nation only make up one of the top seven spots in the fund’s asset profile.
However, investors should note that the fund has had a rough time over the past few months, adding just about 1.1% in the trailing six month period. Additionally, fees are a little higher at 45 basis points a year while volume in the fund—much like ISHG—isn’t too great, suggesting relatively high total costs for this higher yielding short duration fund.
Guggenheim BulletShares 2015 High Yield Corporate Bond Fund (BSJF - ETF report)
Some might be looking for a more American focus in the bond market that still has the ability to deliver outsized yields at the short end of the curve. For these investors, a closer inspection of Guggenheim’s BulletShares lineup of high yield products could be a great idea.
These ‘BulletShares’ track indexes of fixed income securities that have effective maturities in a given calendar year, allowing investors to target their exposure more effectively. By doing this, investors are able to receive a final distribution of NAV at the end of the fund’s life, making these products very similar to the experience that is had in regular fixed income holdings.
Currently, Guggenheim offers investment grade and high yield choices for several years, but we have focused in on the 2015 version of the high yield variety, BSJF, as a way to obtain a modest level of risk/reward while still accessing a fund that has a relatively high volume level (also see Are The Fundamental Bond ETFs Better Fixed Income Picks?).
With this approach, investors have a fund that has an average effective duration of just 2.7 years and 111 securities in total. The yield comes in at roughly 4.9% when looking at the trailing twelve months while the total costs are 42 basis points a year.
Investors should also note that the fund has close to a quarter billion in AUM and average daily volume above 100,000 shares, implying low bid ask spreads. Furthermore, the product has performed relatively well, adding about 1.6% in the past six months and 2% in the past one year period, better than lower yielding short duration treasury bonds in the same time frame.
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