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ETF News And Commentary

Even though interest rates in the domestic U.S. markets have been at extremely low levels, investors have kept their confidence alive in the fixed income market. This is true despite the possibility of the Federal Reserve finally being tired of printing more money, thanks to stronger employment levels in the U.S. (see Target Date Bond ETFs: Best or Worst Fixed Income Funds?).

While this will surely draw the Treasury bond bull run to a close, especially given the fact that that the Fed is the largest purchaser of these debt securities, the big question still remains – WHEN?

Although the quantitative easing will probably have some severe consequences in the Fed balance sheet (which has increased substantially), it seems that the benefits of the easing are finally showing. The unemployment level is gradually decreasing and business as well as consumer spending is slowly inching forward although a low level of inflation still remains a concern for the economy.

Given these facts, it seems rather unlikely for the monetary easing to stop anytime soon, as unemployment rates are still elevated (see Is the Best Performing Bond ETF Really in Europe?).

Nevertheless, bond investors will have their work cut out for themselves as the interest rates are not expected to increase this fiscal year by many analysts. In any case, yield-hungry investors have found solace in other unconventional income sources.

With this backdrop, we would like to highlight yet another unconventional source of yield- via a Zacks Ranked # 2 Bond ETF which investors could consider for current income.

About the Zacks ETF Rank

The Zacks ETF Rank provides a recommendation for the ETF in the context of our outlook of the underlying industry, sector, style box, or asset class. Our proprietary methodology also takes into account the risk preferences of investors as well.

The aim of our models is to select the best ETFs within each risk category. We assign each ETF one of five ranks within each risk bucket. Thus, Zacks Rank reflects the expected return of an ETF relative to other ETFs with similar level of risk (see more in the Zacks ETF Center).

Using this strategy, we have found a Ranked 2 or ‘Buy’ Bond ETF which we have highlighted in greater detail below:

SPDR BofA Merrill Lynch Crossover Corporate Bond ETF (XOVR)

The ETF tracks the BofA Merrill Lynch US Diversified Crossover Corporate Index. The benchmark tracks the performance of such corporate bonds which belong to the lower end of the investment grade spectrum and the higher end of the non investment grade spectrum.

Naturally, given the very nature of the product, one would imagine that the ETF provides an efficient mix in terms of risk return tradeoff offering relative stability (thanks to investment grade bonds in portfolio), along with a scope of high yields (due to junk bonds in its portfolio) (read 3 Reasons to Consider the Crossover Bond ETF).

However, the ETF does not seem to be well placed in terms of popularity and liquidity. XOVR was launched in June of 2012 and since then it has managed to amass an asset base of around $18 million; on an average only around 15,000 shares of XOVR exchange hands each day.

It charges investors 30 basis points in fees and expenses and pays out a yield of 2.19% while holding 223 components in its portfolio. This suggests that the fund is quite spread out and that while trading costs might be somewhat elevated, XOVR clearly has other benefits.

Investors should also note that this bond ETF doesn’t have a whole lot of interest rate risk as it focuses on the intermediate part of the curve with an average maturity of 7.92 years. It also carries moderate levels of interest rate risk as measured by an average duration of 5.67 years (read AGG vs. BND: Which Bond ETF Do You Choose?).

The ETF has fetched total returns of around 3% since its inception and it is expected to continue its strong run going forward. Additionally, its higher yield could help investors seeking bigger payouts that have lower interest rate risk, in case the Fed does look to tighten at some point this year or next.

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