Bond ETF Ideas for Higher Yields
April 25th, 2012 at 1:15pm by Tom Lydon
Investors that are seeking income have to balance their investment decision between increasing risk to gain yield or accepting a lower payoff. Certain exchange traded funds from different fixed income asset classes are offering decent yields.
“In assessing these two options, investors must start with their own tolerance for risk and investment objectives. For those willing to take on additional risk, I continue to advocate reducing duration risk, for which investors are not being adequately compensated, and modestly increasing exposure to spread products, Russ Koesterich, CFA, wrote on the iShares blog.
Investment grade U.S. corporate debt and emerging market bonds are two fixed income asset classes that lagged in 2011, but are offering attractive yields with some risk.
Good values can be found from the Baa class of bonds, based on Moody’s Corporate Bond Index. The iShares iBoxx $ Investment Grade Corporate Bond Fund (NYSEArca: LQD) gives exposure to investment grade U.S. corporate debt during this time of healthy corporate balance sheets lowered government credit quality, reports Koesterich. [Some ETFs to Ride Out Market Volatility]
LQD has about $20.2 billion in AUM and an expense ratio of just 0.15%. The ETF features a distribution yield of almost 4.09%. The fund is up 3.2% year-to-date.
Additionally, emerging market debt is looking less volatile relative to developed markets, and emerging market stocks and bonds should be less volatile relative to their developed world equivalents, says Koesterich. [ETF Spotlight: High Yield Bonds]
The iShares J.P. Morgan USD Emerging Markets Bond Fund (NYEArca: EMB) features emerging markets bonds denominated in U.S. dollars. The $4.5 billion fund also charges 0.6% and yields 4.72%, according to iShares data. Brazil, Russia, Mexico and Turkey combine for about 30% of EMB’s country weight. [What Emerging Market Bond ETFs Are saying About the Market]
Also, the iShares Emerging Markets Local Currency Bond Fund (NYSEArca: LEMB) has $30.1 million in AUM, fees of 0.6% and a distribution yield of almost 4.8%. The fund launched in October 2011, gaining a fast following. The fund holds emerging markets bonds denominated in the local currencies of South Korea and Russia, which dominate the country holdings. [Emerging Market Currency ETFs]
Emerging market debt is more prone to volatility than U.S. debt, and the currency exposure can add extra risk. However, the diversification benefits and the U.S. dollar hedge make up for this.
Tisha Guerrero contributed to this article.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.