Buying bonds can be a confusing business for many investors. Do you really want to tie up your money for a decade in a 10-year T-Note? Are “junk” bonds safe? Who the heck do you call to buy and sell bonds anyway?
Take the guesswork out of bond investing with an ETF. It’s not only easier on you — it’s also pretty good for your portfolio. Some of the top-performing funds of 2011 have been bond ETFs as investors look to get out of the stock market and into low-risk, income-focused investments. Here are a few top bond funds to consider:
The PIMCO 25+ Year Zero Coupon U.S. Treasury ETF (NYSE:ZROZ) is a mouthful, but it is up 40% so far this year. Why? It’s complicated, but the simplest explanation is that many zero coupon bonds are tied to inflation — and as inflation heats up, the value of those bonds rise. Many investors are banking on inflationary trends over the long term, hence a big recent rally for this bond fund.
The PIMCO Build America Bond Strategy ETF (NYSE:BABZ) invests in (obviously) Build America Bonds that are used to fund municipal projects like roads and bridges. The rate of return on these bonds can be significantly better than the rock-bottom rate of U.S. Treasuries, but they carry a very low risk of default. Build America Bonds also carry special tax credits and federal subsidies to boot. All this has led to a nice 15% gain for BABZ in 2011 while the broader market is down.
The iPath US Treasury Long Bond Bull ETN (NYSE:DLBL) is not a fund with bond assets, but rather an exchange-traded note that looks to profit from the change in overall yields. The DLBL fund provides returns based on an increase or decrease in the yields of long-term U.S. Treasury bonds. And obviously since rates are rock bottom and have nowhere to go but up, DLBL has been doing quite well — up 35% so far in 2011.