5 Top Bond Funds & ETF Bond Investments

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Investing in bond funds is usually not exciting.  But then again, in today’s volatile world, investment in a bond ETF with reliable returns can be a comfort.

Bond investment can be a excellent way to stabilize your portfolio. Bond funds and ETFs during the 2008 financial crisis performed well.  Keep in mind that during that tough year the Barclays Capital U.S. Aggregate Bond Index returned 5.24% to investors.  During this time, the S&P 500 fell a staggering 37%.

However, the bond market has many flavors – and also risk levels.  So here’s a look at some of the top:

Vanguard GNMA Bond Fund

The word “mortgage” can be scary to many investors.  But the fact is that a mortgage can be good a investment – especially if the mortgage bond funds focus on good credit quality.

This is certainly the case with the Vanguard GNMA (MUTF: VFIIX) bond funds, which has $35.3 billion in assets.  Much of the portfolio is in Ginnie Maes.  And yes, these are backed by the U.S. government.  There are also investments in Treasuries as well as positions in some Fannie Mae and Freddie Mac issues.

But there are still some risks.  Perhaps the most significant is prepayments from the mortgages.  This generally happens when rates fall.  In other words, there will be a lower return on the portfolio.

The good news is that the Vanguard GNMA has been skillful in dealing with prepayment risk.  At the same time, the fund’s low expense ratio – at 0.23% — gives returns a boost for this bond investment.

PIMCO Real Return (PRTNX)

A terrible enemy of bonds is inflation.  Because bonds, bond funds and bond ETF investments generally provide a fixed amount of income, there will be less purchasing power from these cash flows when the value of the dollar falls.  In light of the budget deficits and commodity surges, it is reasonable that there will be higher inflation over the long haul.

But there are various bond investments that adjust their value for inflation, such as Treasury Inflation Protected Securities.  And one of the top mutual funds in the sector is the PIMCO Real Return (MUTF: PRTNX) fund, which has $18.9 billion in assets.
Interestingly enough, the fund has much flexibility.  For example, it will use exotic investments like futures and forward contracts.  There are even positions in other countries, with a big position in Brazil.

BlackRock High Yield Bond (BHYSX)

Basically, junk bonds are debts from companies that do not have top credit ratings.  While there is definitely risk, the returns have shown to be relatively strong over the long-term.  Although, when it comes to Wall Street, mutual funds avoid the label “junk bonds” and instead refer to them as “high yield bonds.”

Take a look at the BlackRock High Yield Bond (MUTF: BHYSX) fund.  To boost returns, the fund is not afraid to invest in bonds of distressed companies.  Some examples include the debt from Dephi (NYSE: DFG), Clear Channel and CIT Group (NYSE: CIT).

Of course, the BlackRock fund spends much time on analyzing the credit risks.  To this end, the parent company purchased the R3 hedge fund, which has one of the best analytics groups for high-yield bonds.

MFS Emerging Markets Debt (MEDAX)

While yields are low in the U.S. and many other developed countries, this is not the case in emerging economies.  For the most part, there will be higher interest rates when the economic growth rates are strong.

A way to capitalize on this is to invest in an emerging market bond fund, like the MFS Emerging Markets Debt (MUTF: MEDAX).  Volatility can be high – and even gut-wrenching – but the managers of this fund have done a good job of controlling risk.  This means strong credit analysis as well as a focus on government bonds.

The portfolio managers also have extensive experience.  Consider that both Matt Ryan and Ward Brown were economists at the International Monetary Fund.

iShares Barclays 3-7 Year Treasury Bond ETF (IEI)

Exchange traded funds allow investors to buy and sell the security throughout the trading.  They are usually based on an index, which means the fees tend to be low.

As for the bond market, there are a growing number of ETFs.  And one good offering is the iShares Barclays 3-7 Year Treasury Bond ETF Fund (NYSE: IEI), which tracks an index from Barclays. All in all, this bond fund is quite safe, because of the quality of the securities and the intermediate term of the duration of the bonds.  There is also a rock-bottom expense ratio of 0.15%.

Tom Taulli is the author of various books. They include Artificial Intelligence Basics and the Robotic Process Automation Handbook. His upcoming book is called Generative AI: How ChatGPT and other AI Tools Will Revolutionize Business.


Article printed from InvestorPlace Media, https://investorplace.com/2011/03/bond-funds-bond-etf-investment/.

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