The November jobs report, revealed Friday, stoked speculation that the Federal Reserve is on pace to raise interest rates in the first half of 2015.
Even if data remains constructive enough to support a mid-2015 Fed rate hike, that does not mean longer-dated bond exchange traded funds will be imperiled. Nor does a nudge higher for short-term rates mean investors flee bond ETFs, plenty of which are among this year’s top asset gatherers across all asset classes.
As just one example, inflows to bond ETFs topped $17.4 billion in October, besting the previous monthly inflows record of $17 billion set in February.
Investors, particularly at the institutional level, have flocked to bond ETFs this year and that trend is expected to continue in 2015. In its 2014 U.S. Institutional ETF Usage Report published last week, BlackRock, the world’s largest asset manager and parent company of iShares, the world’s largest ETF issuer, noted international equity and fixed income ETFs are expected to be major drivers of ETF growth in 2015. [BlackRock Says Institutional Use of ETFs on the Rise]
There are 1662 U.S.-listed ETFs with an average 0.61% expense ratio, and 285 bond ETFs with an average 0.41% expense ratio, according to XTF data.
The U.S. fixed income ETF industry is on track to hit $300 billion in assets under management for the first time this year and cost-conscious investors can participate in that growth while generating income with some of the following low-fee ETFs.
Vanguard Total International Bond ETF (NYSEArca: BNDX)
Expense ratio: 0.20%
Comment: BNDX is the cheapest international-focused bond ETF, tracking a diversified portfolio of investment-grade government, corporate and securitized fixed-income investments issued in local currencies. However, the ETF employs a currency-hedge to mitigate any negative effects of depreciating foreign currencies. BNDX has a 7.0 year duration and a 1.05% 30-day SEC yield.
Vanguard Short-Term Bond ETF (NYSEArca: BSV)
Expense ratio: 0.10%
Comment: Showing a 2.7 year duration and a 0.96% 30-day SEC yield, BSV includes a basket of investment-grade corporate and government debt securities with an average 1- to 5-year maturity. By moving down the yield curve, short-duration bond ETFs will experience smaller swings in a rising rate environment. For instance, a 1% rise in interest rates would only correspond to about a 2.7% decline in BSV’s performance.
Vanguard Intermediate-Term Corporate Bond ETF (NYSEArca: VCIT) ha
Expense ratio: 0.12%
Comment: VCIT is among the cheapest ETFs to target U.S. corporate bonds. The ETF tracks investment-grade quality corporate debt securities with an average maturity of 5- to 10-years. The fund has a 6.4 year duration and a 3.14% 30-day SEC yield.
iShares Core U.S. Aggregate Bond ETF (NYSEArca: AGG)
Expense ratio: 0.08%
Comment: For a one-stop-shop fixed-income investment option, AGG reflects the performance of the widely monitored Barclays Aggregate Bond Index benchmark, following a basket of investment-grade U.S. Treasuries, mortgage-backed securities, agencies and corporate bonds. For an even more rounded fixed-income portfolio, bond investors would have to add municipal bonds and Treasury Inflation Protected securities. AGG has a 5.14 year duration and a 1.89% 30-day SEC yield.
Schwab Short-Term U.S. Treasury ETF (NYSEArca: SCHO)
Expense ratio: 0.08%
Comment: SCHO is the cheapest way to specifically target short-term Treasury bonds with an average 1- to 3-year maturity. The ETF has a 1.95 year duration and a 0.37% 30-day SEC yield. Some may notice the slightly lower yield compared to something like BSV, but SCHO provides focuses on high quality U.S. government debt with zero corporate bond exposure.
Vanguard Total Bond Market ETF (NYSEArca: BND)
Expense ratio: 0.08%
Comment: BND tracks the float-adjusted version of the Barclays U.S. Aggregate Bond Index, which means that mortgage-backed bonds held by the government are not included. The ETF still includes a basket of investment-grade U.S. Treasuries, mortgage-backed securities, agencies and corporate bonds. BND has a 5.6 year duration and a 2.06% 30-day SEC yield.
Schwab U.S. TIPS (NYSEArca: SCHP)
Expense ratio: 0.07%
Comment: SCHP is the cheapest TIPS-related ETF on the market. TIPS are Treasury bond securities that are indexed to inflation, so the bonds offer some protection against the negative effects of inflation. SCHP has a 7.74 year duration and a -1.61% 30-day SEC yield. TIPS bond yields are equal to Treasury bond yields minus the rate of expected inflation, so yields can be negative if Treasury bond yields are below that of expected inflation.
Schwab US Aggregate Bond (NYSEArca: SCHZ)
Expense ratio: 0.06%
Comment: SCHZ is the cheapest bond ETF on the market. The ETF also tracks the Barclays U.S. Aggregate Bond Index. SCHZ has a 5.13 year duration and a 2.03% 30-day SEC yield.