Economic data coming out isn’t exactly alleviating investor fears and they’re seeking safer bets in these uncertain times. Bond exchange traded funds (ETFs) remain one of the more popular choices, providing liquidity and transparency for a diversified fixed-income portfolio.
As of May, $24.6 billion in net new money had found its way into fixed-income ETFs this year, or up from last year’s $20.6 billion over the same period, reports Tom Sullivan for Barron’s. Though some believe that bonds just aren’t profitable anymore, there are still some benefits in keeping a piece of your wealth in a diverse mix fixed-income ETFs, remarks Sullivan. [The Appeal of Treasury Bond ETFs.]
The weak housing market and high unemployment rates mean that the Fed will keep rates low for a while, which means that bond yields won’t be negatively affected anytime soon.
Bond ETFs are a good way for any investor to gain exposure to the bond market since ETFs have low costs, are very liquid and also provide transparency. Barron’s has highlighted five bond ETFs that have proven to provide results over the years. The following funds are just some of the many bond ETFs available listed for your consideration, though a quick search on our ETF Analyzer reveals far more than this – there are 115 fixed-income products on the market right now, so take your pick:
- iShares Barclays Aggregate Bond ETF (NYSEArca: AGG). AGG tries to reflect the performance of the former Lehman Aggregate bond index that is used as a benchmark for a lot of bond-fund managers. The fund provides medium-term exposure to government bonds, government-sponsored agencies, mortgage-backed securities and corporate bonds – 21% of the fund is vested in bonds rated below triple-A. Average duration of the bonds is four to five years. AGG has an expense ratio of 0.24%.
- Vanguard Total Bond Market ETF (NYSEArca: BND). BND is another fund that tracks medium-term duration bonds. The fund has an expense ratio of 0.12%. Morningstar labels this fund as a “suitable core holding.”
- PowerShares Build America Bond ETF (NYSEArca: BAB). BAB tracks borrowing on debt issued for capital projects, or taxable municipal bonds, which are also unlikely to default. The fund has an expense ratio of 0.28%. Bonds under this ETF may provide yields higher than those of Treasuries. However, liquidity may be low since the “Build America” program is set to expire this year and Congress hasn’t extended it. [Muni Bond ETFs: A Crisis in the Making?]
- Vanguard Long-Term Bond Index ETF (NYSEArca: BLV). Currently, there is a huge gap between the short- and long-term rates. BLV is more of a “buy-and-hold” ETF, with bonds that have durations of up to 12 years, but it is appealing because of the low-interest rate environment. The fund has an expense ratio of 0.12%.
- iShares Barclays Agency Bond ETF (NYSEArca: AGZ). AGZ offers diversified federal government-sponsored agency debt that provide yields above Treasuries.
Not everyone agrees, though, that broad bond funds are necessarily the way to go. Some experts suggest treating your fixed-income portfolio like your equity portfolio, with exposure to a variety of different bond types and maturities. Not all bonds react the same way to different yield and market environments. Use our ETF Analyzer to find bond ETFs that are above their 200-day moving average or that have attractive yields – though Treasuries are way down right now, there are some appealing yields to be had in high-yield and investment-grade corporate bond ETFs.
For more information on bond ETFs, visit our bond category.
Max Chen 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.