Bonds are strange things. Very few investors actually own individual bonds. They can be annoying to trade, because they require tracking down a CUSIP number. They are often only available in $10,000 chunks.
Unless you have a financial advisor, who might create a laddered structure for you, you are on your own
That’s why the market created ETFs. In fact, I think ETFs are probably more useful for bond investors than for equity investors. You can always buy individual stocks to the point where you are diversified, but bond funds are of far more use.
As with laddering individual bonds, you’ll want to consider at least three different bonds funds to give you access to the range of maturities. That assumes, of course, that you are comfortable with all ranges of maturities for bond funds. Otherwise, stick with what you know you can handle on the risk side of the equation.
Here’s a look at the best bond funds in the short-term, intermediate-term and long-term categories.
Best Bond Funds: Short-Term
When it comes to short-term bonds, I know that risk is pretty limited and therefore the yield is rather low. I’m actually not a fan of short-term bond funds as a result, but I recognize that conservative investors desire them, if for no other reason that they yield a teensy bit more than the money market.
I think you go with the straight-ahead bond fund choice here with Pimco Enchanced Short Maturity Active ETF (MINT). The fund has 5.5 years of history behind it, and $3.54 billion in assets. The trading volume is about 190,000 shares daily so there’s plenty of liquidity in this bond fund.
With 545 holdings encompassing just about every high-quality bond from every high-quality public company, your risk here is negligible. Of course, with said negligible risk comes an estimated yield to maturity of only 1.57%, an SEC 30-day yield of 0.78%, and a distribution yield of 0.80%. You also pay 0.35% in expense ratio, or $35 annually for every $10,000 invested, so this bond fund won’t be making you rich.
The bond terms are incredibly short, with effective durations of 0.40 years and effective maturities of 0.41 years. The ultra-short term nature means the yield can get bumped up a bit by adding in high-quality corporate debt.
Best Bond Funds: Intermediate-Term
Moving to the intermediate side for best bond funds, have a look at Vanguard Intermediate-Term Corporate Bond ETF (VCIT). I know conservative investors want to stick with Treasuries, but given the quality of the holdings here, and Vanguard’s conservative reputation, I wouldn’t get too bent out of shape.
For starters, this bond fund has 1,672 bonds. While the bonds are 41% A-rated and 51% Baa-rated, we are talking recognizable names that aren’t going anywhere and are going to make good on their bonds. These are blue chips financials paying 4% to 5%. That’s why the average coupon is 3.9% and the yield to maturity is 3.2%.
The average duration is 6.5 years and average effective maturity is 7.5 years. So while a lot can happen in that length of time, it would have to be catastrophic for it to all fall apart. While this bond fund didn’t launch until after the financial crisis, and another one could occur, I feel reasonably certain you’ll do just fine as long as your investment horizon is 10 years or longer.
Best Bond Funds: Long-Term
The long side of the best bond funds is where we want to be a bit more judicious in our choices.
The problem, however, is that the long bond has not been the favorite of investors for quite some time. You see, these bonds offer higher yields, but the risk is such that — even with government issues — you can get virtually the same risk profile with better rewards with preferred stocks.
So if you insist on long bond ETF, think about the Vanguard Long Term Government Bond ETF (BLV). This fund invests in a sampling of fixed income securities issued by the U.S. Treasury and U.S. government agencies and instrumentalities, as well as corporate or dollar-denominated foreign debt guaranteed by the U.S. government, with maturities greater than 10 years.
As for the sampling aspect, the idea is that the range of securities approximates the Barclays US Long Government Float Adjusted Index as far as its risk factors.
You may be dismayed to only find 720 government bonds here, but there just aren’t that many government-issued bonds out there. The whole point is that you are betting entirely on the solvency of the federal government. Despite cries of having drastically overextending our debt, which we have, we will always make good on it.
The average coupon here is 4.9% and the yield to maturity is 3.9%. The average duration is 15 years. BLV has an average annual return of 7.99% since inception in late 2009. That’s all well and good … but, again, I would just as soon buy into iShares US Preferred Stock ETF (PFF), with its 6% yield. There’s less fluctuation in price, meaning less volatility.
Lawrence Meyers is the CEO of PDL Capital, a specialty lender focusing on consumer finance. As of this writing, he was long PFF. He has 20 years’ experience in the stock market, and has written more than 1,200 articles on investing. He also is the Manager of the forthcoming Liberty Portfolio. Lawrence Meyers can be reached at TheLibertyPortfolio@gmail.com.
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