Bond investors are increasingly turning to easy-to-use, cheap and efficient exchange traded funds to get their fixed-income fix.
According to BlackRock data, fixed-income ETFs attracted 54% of all exchange traded product inflows over the first five months of the year, writes Todd Rosenbluth, S&P Capital IQ Director of ETF Research, for CNBC.
“Bond ETFs can be used to manage interest rate exposure tied to the Federal Reserve, credit quality as investors seek greater yield from lower-quality bonds and to capture global fixed-income opportunities,” Rosenbluth said.
For example, the iShares Core U.S. Aggregate Bond ETF (NYSEArca: AGG), with $17 billion in assets, tries to reflect the performance of the widely monitored Barclays Aggregate Bond Index, which provides exposure to a diversified basket of U.S. Treasuries, U.S. mortgages and agency bonds, along with investment-grade corporate bonds. [Bond ETFs Bulk Up]
AGG has a 0.08% expense ratio, a 2.0% 30-day SEC yield and a 5.2 year duration.
“S&P Capital IQ believes many investors are using AGG for their core fixed income exposure and strategically increasing exposure to certain bond investment styles,” Rosenbluth said.
Additionally, investors have utilized bond ETFs to change the amount of rate risk their fixed-income portfolios were exposed to. In 2013, short-term bond funds added $36 billion in new assets, whereas long-term funds saw $8.7 billion in outflows. Over the first five months this year, short-term debt ETFs attracted $9.4 billion as well.
The Vanguard Short-Term Bond ETF (NYSEArca: BSV) provides exposure to short-duration investment-grade bonds, with an average duration of 2.7 years and a 0.8% 30-day SEC yield. Duration is a measure of a bond fund’s sensitivity to change sin interest rates, so a 1% rise in benchmark rates would translate to about a 2.7% decline in BSV. [Tactical Asset Allocation With ETFs]
Fixed-income investors can also shift their exposure to credit risk and potentially garner greater returns. The iShares iBoxx $ Investment Grade Corporate Bond ETF (NYSEArca: LQD) provides exposure to investment-grade corporate debt mostly rated A or BBB. LQD has a 0.15% expense ratio, a 3.06% 30-day SEC yield and a 7.68 year duration. [Safe Bond ETFs Outperforming in Corporate Debt Market]
For an even riskier take, investors can take a look at speculative-grade debt exposure, with the iShares iBoxx $ High Yield Corporate Bond ETF (NYSEArca: HYG), which mostly holds junk-rated BB and B debt. HYG has a 0.50% expense ratio, a 4.21% 30-day SEC yield and a 3.89 year duration.
Investors can also go global with a broad international corporate bond ETF, like the SPDR Barclays International Corporate Bond ETF (NYSEArca: IBND), which includes exposure to France, the U.K. and Germany, among others. IBND has a 0.55% expense ratio, a 0.97% 30-day SEC yield and a 5.01 year duration.
Alternatively, the iShares J.P. Morgan USD Emerging Markets Bond ETF (NYSEArca: EMB) provides exposure to emerging market debt. The holdings include U.S.-denominated debt, which diminishes currency risks, along with 64% of assets in investment-grade quality bonds. EMB has a 0.60% expense ratio, 4.26% 30-day SEC yield and a 7.07 year duration.
For more information the fixed-income market, visit our bond ETFs category.
Full disclosure: Tom Lydon’s clients own shares of EMB, HYG and LQD.