Michael Schmidt at Investopedia lists the following ways an investor can put bonds to use:

• Preserve principal. Bonds are essentially loans with scheduled repayments and maturities, therefore making them effective at preserving principal.

• Savings. Savings bonds have been used for decades as a method to build savings and provide one of the most secure and time-tested approaches to long-term savings.  To make them even more attractive, they are guaranteed by the full faith and credit of the U.S. government

• Managing interest-rate risk. This type of risk is inherent in bonds because their value is a culmination of the present value of the future interest payments and returned principal upon maturity.  There is an inverse relationship between interest rates and bond prices.

• Expense matching/immunization. Individual investors use bonds to match a future expected cash need. Institutions use this strategy on a more complex basis, called immunization, which assumes a match of the duration of the bond to the expected cash flow, which can be accomplished by using a zero-coupon bond.

• Long-term planning. Bonds have a steady stream of income, which can be used to fund future expenses for individuals and corporate pension obligations for institutions.  This is why financial institutions use long-term bonds for long-term planning.

There are a number of bond ETFs on the market right now that suit a wide range of risk appetites and goals. One way to grab the benefits of bonds could be through a broad ETF such as the iShares Barclays Aggregate Bond Fund (AGG), which is up 1.6% year-to-date.

For more stories on bond ETFs, visit our bond ETF category.

Kevin Grewal contributed to this article.

Conventional wisdom may say that bonds are so high now that there’s only one direction left. Dividends4Life on Seeking Alpha notes some recent headlines when it comes to bonds – that stocks have underperformed long-term Treasuries, the Treasury bond rally has been petering out and Washington’s influx of cash could send prices to the floor while yields soar.

For the income investor, though, it should matter little. So, what should you do?

1. Don’t give up on stocks. Just because recent numbers have shown that bonds have outperformed in various time frames doesn’t mean that you should shun them altogether. The key practice in an asset allocation model leads to bonds and stocks working well together to help reduce overall volatility in a portfolio. Basically, those investors who were invested in bonds during the market crash did better off than those who were entirely in stocks.

2. Explore longer-term bonds if you’re the type of investor who favors stability of income, write John Y. Campbell and Luis M. Viceira in a report for the National Bureau of Economic Research. Consider bond ETFs, too. They can give an investor broad exposure at a low cost. Some funds Dividends4Life is considering include:

• Vanguard Long Term Bond ETF (BLV): yields 5.37%

• iShares Barclays Aggregate Bond (AGG): yields 4.28%

• iShares iBoxx $ Investment Grade Corporate Bond (LQD): yields 5.49%

For more stories about bonds, visit our bond category.

For full disclosure, Tom Lydon’s clients own shares of LQD.

Do buy-and-hold investors who seek exposure to emerging markets have to just stomach the wild, volatile ride and stick to a 5% allocation in these regions?, asks Gary Gordon for ETF Expert.

There may be a middle ground for those faced with this decision. If an investor wants stronger exposure to these regions with a better upside potential, Gordon suggests that the best bet is to offset that risk with low-correlating and non-correlating investments.

It is up to you to do the research to see what ETF you’re holding, in order to ensure low correlations. Here are five ETFs that can help ease up emerging market fund risk, against iShares MSCI Emerging Market Index (EEM):

• iShares Aggregate Bond Fund (AGG): down 0.3% year-to-date; 0.40% correlation
• PowerShares VRDO Tax-Free Weekly (PVI): up 0.7% year-to-date; 0.05% correlation
• iShares NASDAQ Biotechnology (IBB): up 1.8% year-to-date; 0.68% correlation
• iShares Barclays MBS Bond (MBB): up 1.8% year-to-date; -0.32% correlation
• SPDR Gold Shares (GLD): up 6.8% year-to-date; 0.71% correlation

For more stories about emerging markets, visit our emerging markets cateogry.

Index IQ’s first hedge fund ETF is setting the bar for the 15 new funds that will track indexes created by IndexIQ. The IQ Hedge Multi Strategy Tracker (QAI) debuted on the NYSE Arca electronic stock exchange last month, reports FIN Alternatives.

The ETF invests in other ETFs such as the iShares Lehman Aggregate Bond Fund (AGG) or the iShares MSCI Emerging Markets Index (EEM). Jeff Benjamin for Investment News notes that the ETF is being marketed as a low-cost retail-investor gateway to access the mysterious world of alternative investments. Benjamin says the fund passes muster on some big points: it offers the liquidity that characterizes ETFs, full transparency and low fees. The expense ratio is 1.09%, which is high for an ETF, but low when compared with other active strategies.

The planned ETFs are equal-weighted and asset-weighted versions of the Multi-Strategy Tracker ETF, as well as an inverse version. Strategies getting their own ETFs include absolute return, convertible arbitrage, dedicated short-bias, distressed, managed futures, market directional, merger arbitrage and relative value. Expense ratios are not yet determined.

These new ETFs are unique and give investors the kind of options they’ve been seeking, especially when they target markets that were previously unavailable to them. The big question is whether these ETFs will outperform the general markets and give protective hedging strategies to protect investors from downtrends.

If you are searching for a bond-focused ETF to help round out your portfolio or keep assets in safety, the good news is there are about 58 different bond funds on the market. Jeffrey R. Kosnett for Kiplinger explains that this is more than enough to build any imaginable income portfolio, taxable or tax-exempt, using ETFs exclusively.

Overall, bond ETFs are pretty straightforward, easy to interpret and fill investment needs expediently. Among the ways they can be used:

• Treasury ETFs come in a range of maturities, and you can shift them up or down depending on where you think interest rates are headed. If you think they’re heading up soon, then long-term bonds would take a hit.
• With corporate bond ETFs, you can select from a few ETFs that target hunk bonds. There are also a number of ways to access investment-grade funds, as well.
• Worried about inflation? Try TIPS (Treasury inflation-protected securities). iShares Barclays TIPS Bond (TIP) and SPDR Barclays Capital TIPS (IPE) have an average maturity of nine years, and buys TIPS across the yield spectrum. The so-called Tips funds are are good preparer for inflation, which many say is looming ahead of us in the near future. Richard Lehman for Forbes says that while people are talking so much about deflation, what people should be wary of is inflation. While inflation can provide short-term relief, it’s harmful in the long run because it stifles real growth, hurts productivity and hurts savers.
• If you just can’t decide, try a total bond market ETF. The Vanguard Total Bond Market Index (BND) and iShares Barclays Aggregate Bond Fund (AGG).
• Municipal bonds are proving to be a safe haven in these current market conditions. Under “normal” market conditions, the tax-free municipal bonds usually yield less than taxable bonds. Since the market is upside down right now, the non-taxable bond can actually offer better yields than most. Since states and towns can raise taxes to meet debts, muni bond defaults are extremely rare (but still possible). iShares S&P National Municipal Bond (MUB) and SPDR Barclays Capital Short-Term Muni Bond (SHM) are two ways to access this market.

Discuss fixed-income in our forums. How do you use these ETFs in your portfolio?

A few bond funds and their charts:

• iShares Barclays Aggregate Bond Fund (AGG) down 1.9% year-to-date; current yield 4.53%

• iShares Barclays 7-10 Year Treasury Fund (IEI): down 0.61% year-to-date; current yield 2.79%

• SPDR Barclays Capital Long Credit Bond ETF (LWC): up 1.2% year-to-date

One eye-catching asset class for intrepid investors is in high-yielding corporate bonds, writes Chance Carson for Seeking Alpha. High-yield bonds, also known as junk bonds, are debt instruments issued by corporations with BBB or lower credit ratings. Interest rates on high-yield debt currently exceeds Treasury bond yields by 18 to 20%. ETFs that provide a glimpse into the world of high-yield bonds include:

• iShares iBOXX $High Yield Corporate Bond (HYG): down 6.9% in the last month; yields 10.6%

• PowerShares High Yield Corporate Bond (PHB): down 10.7% in the last month; yields 12.9%

• State Street’s SPDR Lehman High Yield Bond (JNK): down 6.5% in the last month; yields 13.6%

It should be noted that along with high yields comes a higher risk of default by the issuer. Forecasts put high-yield bond defaults in 2009/2010 around 15%. It is important to understand one’s own risk tolerance since some may have a higher, or lower, level of tolerance for risk.

Another ETF type that provides a blend of Treasury bonds and corporate bonds includes asset classes of Treasury and agency bonds (around 37%), mortgage-backed securities (38%), and investment-grade corporate bonds (25%). These ETFs try to replicate the Barclays Capital U.S. Aggregate Bond Index:

• iShares Barclays Aggregate Bond (AGG): down 3.2% in the last month; yields 4.6%
  

• Vanguard Total Bond Market ETF (BND): down 1.4% in the last month; yields 4.6%
  

• SPDR Barclays Capital Aggregate Bond (LAG): down 3.3% in the last month; yields 4.4%
  

Lastly, investors looking for a 100% investment-grade corporate bond can peruse iShares iBoxx $ Invest Grade Corp Bond (LQD), which is down 2.7% in the last month and yields 5.6%

In fact, bonds of all types took their licks this year. Tara Seigel Bernard for The New York Times explains that even though the bond market did not take a 40% decline like the general stock market did, they did suffer losses. Treasuries remained the lone place to hide, and diversified bonds bonds stuck it out, too.

The lesson here is that diversification is a key element to stave off as much loss as possible. ETFs offer instant diversification, while giving investors the kind of exposure to a range of bonds that would be costly if they were bought one by one.

Nevertheless, for the older investor, any loss in fixed income is unwelcome, and untimely, as “the return of principal is more important than the return on principal.” Conditions may worsen before they improve, so older investors should check that their bond investments are indeed what they thought they were.

Moreover, several advisers and bond experts recommended that investors maintain higher cash reserves than they might in more normal times.

A peek at some bond ETFs:

• Vanguard Long Term Bond Fund (BLV): up 10.8% year-to-date

• iShares Barclays Aggregate Bond (AGG): up 7.8% year-to-date

• SPDR Barclays Capital TIPS (IPE): up 0.7% year-to-date

Record volatility in the markets has wound up creating a gap between the value of bond ETF holdings and what the ETFs are trading at on the market, reports Trang Ho for Investor’s Business Daily.

Jim Wiandt for Index Universe wrote earlier this week about the iShares Lehman Aggregate Bond (AGG), which had an 8% discount to the NAV last week. AGG holds a mix of Treasuries, mortgaged-backed securities, corporate and industrial bonds.

Response to a bond ETF trading more like a closed-end fund (CEF) and bought at a discount, as Murray Coleman suggested, is worth examining, but Wiandt says there are big differences. With a CEF the underlying price is somewhat known, and trading at a premium or discount is more indication of how the fund is doing. With a bond ETF, the underlying index does not reflect the actual price of the underlying.

The ETF is effectively serving as the price discovery mechanism for essentially unknowable markets. What the market is saying on pricing is a much safer bet. So, as far as a bond ETF goes, the reason an investor put their money there is for safe keeping, and if the action going on within the fund is a mystery, than it depletes the entire purpose.

Because of how they’re structured, ETF prices will always vary slightly from their indicated net asset value (NAV), but the widening seen in bond funds really came as market volatility spiked in September when Lehman Brothers failed.

As more control comes into the markets, we’ll begin to see greater liquidity and the discount to NAV gap will ulimtately close. But it doesn’t mean that the value of the bonds can’t continue to fall.

Graphic courtesy of Investor’s Business Daily.

Barclays will take over the division for what amounts to a song in this day and age – just  $250 million, report Joe Bel Bruno and Stephen Bernard for the Associated Press. Lehman filed for bankruptcy earlier this week after it was unable to find financing or fresh capital.

The sale to Barclays could be finalized within a matter of days.

ETF lawyers say that this sale could wind up being a pain for iShares, reports Ian Salisbury for Dow Jones Newswires. More than a dozen iShares track popular Lehman indexes, such as the $9.8 billion iShares Lehman Aggregate Bond Fund (AGG), which tracks the Lehman Brothers U.S. Aggregate Index.

The problem is that the Securities and Exchange Commission (SEC) has long prohibited firms from basing ETFs on benchmarks they own. The rule isn’t iron-tight, however.

WisdomTree owns indexes that serve as the basis for ETFs, but they were required to seek special permission and make concessions about how those indexes are run. For example, they have to disclose all rules that govern the indexes and any changes to those rules must be announced 60 days before they’re made.

One attorney says that Barclays might have an easier time convincing the SEC to grant it special permission, since the Lehman indexes are long-established and widely followed.

Pacific Investment Management Co., better known as Pimco, filed with the Securities and Exchange Commission (SEC) for a line of bond ETFs, reports Murray Coleman for Index Universe. The first fund with track the Lehman Bros. Aggregate Bond Index, which is one of the most widely followed U.S. benchmarks.

Two other ETFs that follow the same index have gathered more than $11 billion in assets: the iShares Lehman Aggregate Bond Index (AGG) and the Vanguard Total Bond Market (BND).

Pimco manages about $224 billion in U.S. mutual fund assets. The firm has a long history of active management, but when it comes to ETFs, they’ll be exploring both active and passive strategies.

If Pimco gets into active ETFs, it will be joining funds such as the Bear Stearns Low Duration Portfolio (YYY), which happens to be not only the first active ETF, but the first active bond ETF. PowerShares followed up with the PowerShares Low Duration Fund (PLK).

Pimco’s entree into the ETF marketplace is great news. Interest rates are at record lows, and since the stock market is still down, an asset manager like Pimco could be a welcome player in the ETF space.