With low prices and attractive yields, bonds in the current market environment are a compelling option. Rather than dive into a vast pool of individual bond options, exchange traded funds (ETFs) can provide a low-cost and convenient option.
“Given the higher risks and costs associated with portfolios of individual bonds, and the time they take to manage, most investors are better served by low-cost mutual funds and ETFs,” said Chris Tidmore, senior manager at Vanguard’s Investment Advisory Research Center. “This is particularly true in the case of municipal and corporate bonds, which are less liquid and harder to purchase than Treasury bonds.”
As mentioned, municipal bonds offer a prime option for consideration and for easy ingress into this corner of the market, consider the Vanguard Tax-Exempt Bond ETF (VTEB). VTEB, with its low 0.05% expense ratio, tracks the Standard & Poor’s National AMT-Free Municipal Bond Index, which measures the performance of the investment-grade segment of the U.S. municipal bond market. Overall, this index includes municipal bonds from issuers, primarily state or local governments or agencies whose interests are exempt from U.S. federal income taxes, and the federal alternative minimum tax.
In addition to being lauded for their credit quality versus riskier debt, munis in the current market will also offer competitive yields. To that note, VTEB brings a yield of 3.61% (as of May 13).
For more yield, corporate bonds are worthy of mention or more specifically, the Vanguard Total Corporate Bond ETF (VTC). With an expense ratio of 0.04%, the fund seeks to track the performance of the Bloomberg U.S. Corporate Bond Index, which measures the investment-grade, fixed-rate, taxable corporate bond market. The index includes U.S.-dollar-denominated securities publicly issued by industrial, utility, and financial issuers. Also as of May 13, the fund’s 30-day SEC yield is 4.16%.
A Broad Bond Option
Investors who want a little bit of everything in a broad option should consider the diversified Vanguard Total Bond Market Index Fund ETF Shares (BND). The fund seeks to track the performance of the Bloomberg U.S. Aggregate Float Adjusted Index and has a low expense ratio of 0.03%.
That index represents a wide spectrum of public, investment-grade, taxable, fixed income securities in the United States, including government, corporate, and international dollar-denominated bonds, as well as mortgage-backed and asset-backed securities, all with maturities of more than one year. BND essentially provides bond diversification all in the convenience of one fund.
“The main benefit of bond funds for investors is convenience,” Tidmore added. “Bond funds offer significant time savings over building and managing portfolios of individual bonds yourself, and allow investors to build a broadly diversified bond portfolio with only a few funds.”
For more news, information, and analysis, visit the Fixed Income Channel.