Market participants expect more high-grade issues will be sold as earnings pick up and blackout periods commence. Researchers note that investors are likely feeling more comfortable with corporate debt in light of the strong earnings season just witnessed.
If you’re still concerned about default risk, you may be more comfortable withiSharesiBoxx $ Investment Grade Corporate Bond (NYSEArca: LQD), which still offers an attractive 4.75% yield – better than most Treasury bonds.
For higher yield and higher risk,iSharesiBoxx $ High Yield Corporate Bond (NYSEArca: HYG), PowerShares Fundamental High Yield Corporate Bond (NYSEArca: PHB) and SPDR Barclays Capital High Yield Bond (NYSEArca: JNK) might be right up your alley. All three offer yields currently well above 7%.
International Treasury Bonds
Last, but certainly not least, is the international Treasury bond space.
Thanks to their low correlation with U.S. debt, such bonds can help you further diversify your clients’ portfolios while giving them exposure to fixed-income markets outside the United States.
This market was thrust into the spotlight in 2010 as the European debt crisis deepened, and it could become more appealing as the crisis abates and investors gain confidence in the ability of troubled countries to meet their obligations.
There are two types of international Treasury bonds: developed market debt and emerging market debt.
Naturally, developed market debt has less risk, but it’s not non-existent. In fact, the troubles in Europe over the last year have underscored the fact that there are some real risks, even in industrialized nations. SPDR Barclays Capital International Treasury Bond (NYSEArca: BWX) and iShares S&P/Citi International Treasury Bond (NYSEArca: IGOV) are two examples of developed market bond funds.
Emerging market debt, like emerging market equities, also come with a certain degree of risk. But for both developed and emerging countries, the benefits of using ETFs to get this exposure are clear: by spreading the allocation across several countries instead of just one or two, the risks are reduced (but again, not gone).
PowerShares Emerging Market Sovereign Debt (NYSEArca: PCY) and WisdomTree Emerging Markets Local Debt (NYSEArca: ELD) are two examples of the exposure you can get to emerging market fixed-income.
Fixed-Income ETFs
Why would you consider owning fixed-income ETFs for your clients? That’s easy: you can get all kinds of bond exposure at a far more manageable price. If you’d rather go out and cherry-pick individual bonds, it would take a fortune to get the same exposure you could get in one easy ETF.
Further, owning bonds in ETF form takes much of the work out of your hands. For example, you don’t have to concern yourself with when issues mature.
Fixed-income ETFs also make it easy to fine-tune the exposure your clients get. As the interest rate environment shifts, you can easily make the necessary moves because ETFs are so liquid, transparent and inexpensive.
To find all the available fixed-income ETFs, select “fixed-income” from the drop-down menu on the ETF Analyzer. As a pro subscriber, you also have alerts and portfolios at your disposal.
For full disclosure, Tom Lydon’s clients own SHY, LQD and JNK.