It’s been a bad year for fixed income. The Federal Reserve raising interest rates to tamp down high inflation has contributed to the Bloomberg U.S. Aggregate Bond Index benchmark being down about 15% in the last 12 months — not exactly the safe haven bonds have always been touted as.
That said, there’s a silver lining. Since yields rise when bond prices fail, this has made fixed income ETFs more appealing to investors. Mike Mulach, a senior manager research analyst at Morningstar, told the Wall Street Journal: “With yields so much higher than a year ago, that represents a lot of opportunity.”
So, after looking at fixed income ETFs ranked by Refinitiv Lipper with consistent track records, quality management, above-average returns, and below-average fees and consulting Morningstar, Refinitiv Lipper, and VettaFi, the Journal noted some opportunities out there in the fixed income ETF space. Among them are the Vanguard Total International Bond Index Fund ETF Shares (BNDX) and the Vanguard Tax-Exempt Bond ETF (VTEB).
BNDX seeks to track the performance of a benchmark index that measures the investment return of non-U.S. dollar-denominated investment-grade bonds. The fund employs an indexing investment approach designed to track the performance of the Bloomberg Global Aggregate ex-USD Float Adjusted RIC Capped Index (USD Hedged), which provides a broad-based measure of the global, investment-grade, fixed-rate debt markets.
With an expense ratio of just seven basis points and a yield of 2.59%, BNDX is an inexpensive way to gain exposure to debt instruments of many countries and companies domiciled outside the U.S. It also earns high marks from Refinitiv Lipper for five-year consistent returns, total returns, and expenses.
“It’s really well-diversified across international markets,” Todd Rosenbluth, head of research at VettaFi, told the Journal. “What’s interesting is that it’s mostly sovereign bonds, but not entirely, with some exposure to corporates and asset backed as well.”
Rosenbluth added that the fund is “also hedged, so it’s protecting you against the strong U.S. dollar. That allows investors to benefit from local bonds without concern for currency fluctuations.”
VTEB, meanwhile, 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. This index includes municipal bonds from issuers that are primarily state or local governments or agencies whose interests are exempt from U.S. federal income taxes and the federal alternative minimum tax (AMT).
Not only does the fund carry a high yield of 3.58%, but its tax-free municipal holdings make it an enticing option when held within taxable accounts, and it carries an expense ratio of only 0.05%.
“It’s a very diversified portfolio of investment-grade municipal bonds at a really cheap price,” Mulach said. “It’s going to be tough to beat over the long-term.”
For more news, information, and analysis, visit the Fixed Income Channel.