ETFs have turned my investment strategy upside-down. You can get just about any investment in the form of an ETF, giving you that precious instant diversification. Like mutual funds, however, you have to weigh what each ETF brings to the table.
For bond ETFs, which is today’s topic, there’s quite a range of options. In some ways, it is almost more difficult to choose bond ETFs than stocks. Do you go with US bonds only, or do you dip into emerging markets?
I’ve been posting my thoughts each week on three ETFs from different sectors or asset allocations, one each for the conservative investor, the aggressive investors, and the all-around investor. This week, however, I’m going to alter things a bit because we’re dealing with bonds. All three selections have big allocations to the U.S. in order to avoid emerging markets, which I view as too risky for bonds at this time.
According to ETFdb.com, there are roughly 280 bond ETFs, with expense ratios ranging from just 0.06% to 1.65%. Their year-to-date (YTD) returns range from a loss of 53% to a gain of 85%.
Here’s a look at three of the best high-yield ETFs in the bond sector.
Best ETFs — Vanguard Long-Term Bond ETF (BLV)
For aggressive investors, I suggest Vanguard Long-Term Bond ETF (BLV). It’s the best ETF in its class this year, with a total return of 18% year-to-date, while the five-year total return is 58%. The reason, of course, is that the maturities of the bonds in this bond ETFs are very far out. The further out the maturity, the more risk that the entity issuing the bonds will encounter bad times. That risk boosts the yield, and investors have rotated out of short-term bonds that pay very little, driving up prices for things like BLV.
This bond ETF’s assets are diversified with 51% government bonds (all of which represent the top ten holdings, for 165 of the asset base), 39% corporate bonds, 4.8% municipal taxable bonds, 3.9% government-related bonds, and a smattering of others.
A solid 84% of the holdings are U.S.-based. As mentiond, the top 10 holdings are all U.S. Treasury Bonds, yielding between 2.75% and 4.75%. The U.S. Government won’t go bankrupt, so the bonds will be good at the end of their maturity. The only question is what they’ll be worth.
Expenses for BLV run 0.1%, or just $10 per $10,000 invested.
Best ETFs — Vanguard Short-Term Bond ETF (BSV)
If you’re a more conservative investor looking for the best ETFs, I suggest you keep things short — as in, short-term bonds — and go with the opposite of the above: the Vanguard Short-Term Bond ETF (BSV). This isn’t going to yield big returns, with a flat YTD performance and a five year return of 9.7%, but it provides conservative investors with a dollop of income with very little risk.
I would normally suggest conservative investors avoid short-term bond ETFs. They just don’t yield enough, so in this case, when I refer to “conservative,” I really do mean investors who are really only seeking capital preservation as opposed to earning any real return on their money.
The top 10 holdings account for only 12% of the assets. All of them are U.S. Treasury Notes, ranging in yield from 0.625% to 2.125%.
The breakdown is 60% Government Bonds, 25% corporate, 12% government-related and 3% cash. The expense ratio is 0.1%, which is typically low for Vanguard funds.
Best ETFs — iShares Barclays Aggregate Bond Fund (AGG)
The best ETF for all-around bond income seekers is the iShares Barclays Aggregate Bond Fund (AGG), a broadly diversified bond ETF, with a super-cheap 0.08% expense ratio. EZM is up 5.4% YTD.
This is truly as broad a bond ETF as you’ll find, being an index composed of the total U.S. investment-grade bond market.
AGG is truly enormous, with 3200 holdings. The top 10 holdings account for 14% of the total asset base, but six of those spaces are held by U.S. Treasury Notes, and one U.S. Treasury bonds. I’m not crazy about seeing Federal National Mortgage Assctn Fnni Me (FNMA) holding three positions, but virtually every bond fund is going to own them these days. I just don’t like the ongoing risk at FNMA.
Otherwise, I’m comfortable with the range of notes from 0.375% to 3.625% in that top 10. In all, 60% of the bond ETF is devoted to U.S. bonds, and there’s a 23% allocation to international. Expense run 0.13%.
As of this writing, Lawrence Meyers did not hold a position in any of the aforementioned securities. He is president of PDL Broker, Inc., which brokers financing, strategic investments and distressed asset purchases between private equity firms and businesses. He also has written two books and blogs about public policy, journalistic integrity, popular culture, and world affairs. Contact him at firstname.lastname@example.org and follow his tweets at @ichabodscranium.