The struggle to find bonds worth investing in over the past few years just keeps getting worse. It was bad enough that the Fed drove interest rates to near-zero, which killed yields on virtually every type of bond.
Now, however, the Fed seems intent on raising rates. That’s nice as far as trying to get back some high yield, but when rates rise, the price of bonds fall. That means investors end up losing money if they were holding bonds.
There’s not much you can do about interest rate risk, as far as the Fed moving rates around. That’s why most gurus will rightly suggest that you create a laddered series of bonds, diversified across high yield, maturity and type so that you aren’t destroyed by any given risk element rearing its head.
Here are three suggestions of bond exchange-traded funds to add to your overall bond investing strategy if you hunt high yield.
High-Yield Bond ETFs to Buy: PowerShares Senior Loan ETF (BKLN)
Expenses: 0.65%, or $65 per $10,000 invested
The PowerShares Senior Loan ETF (BKLN) is an intriguing way to work diversified bond strategies into your portfolio.
First, BKLN is comprised of market-weighted institutional leveraged loans. That is, these are loans made by institutions to large corporations.
The yields on these loans are not fixed. They float, so if rates rise, you get the benefit of the increased rates. However, because the duration of these loans averages about four years, it reduces the price risk associated with rate increases. In 2013 when the 10-Year Treasury rose from 1.67% to 3.03%, most corporate bonds took a big price hit. This ETF did not.
Another beautiful thing about the BKLN is that it consists of senior secured loans. That means if the company lent to gets into trouble, these loans get paid off first, so there’s less risk to principal.
BKLN has a high yield — a very attractive 4.27% — and is up about 1.1% so far this year.
High-Yield Bond ETFs to Buy: Market Vectors AMT-Free Intermediate Muni ETF (ITM)
Another relatively conservative bet is the Market Vectors AMT-Free Intermediate Muni ETF (ITM).
Muni bonds are issued by municipalities and are generally considered pretty darn safe, because they are secured by revenues from a variety of sources. State muni bonds are usually secured by tax revenues. Municipalities, like cities or counties, will have bonds associated with things like utilities, which are collecting revenues on a regular basis. School district bonds are secured by things like property taxes.
The great thing about the ITM fund is that it consists of almost 1,600 different muni investments across the country. They are diversified across state-issued bonds, sales-tax-secured bonds, counties, school districts, utilities, water districts ii you name it.
It yields 2.26%, of which about 0.24% goes to pay expenses. It pays monthly distributions, as well. Most of the bonds are rated “A” and higher. Maturities average about 11 years. Ah, but since these are muni bonds, many are non-taxable, which pushes that paid yield into something approach a high yield.
High-Yield Bond ETFs to Buy: Vanguard Total International Bond ETF (BNDX)
For the broadest type of bond ETF that offers a hair more yield with a hair more risk than just a straight-up U.S. Treasury fund, consider the Vanguard Total International Bond ETF (BNDX). For starters, it’s a Vanguard fund, so expenses are only 0.15% against a yield of about 1.5%.
It is a broadly diversified bond ETF, with 57% of bonds coming from Europe, 28% from the Pacific Rim and 7% from North America. About 23% of the bonds in BNDX are rated “AAA”, 28% are rated “AA”, and 31% are rated “A”.
The average duration is nine years, so there is interest rate risk here, but it isn’t outlandish. Best of all, it holds almost 4,000 bonds, so it would take the zombie apocalypse to totally crater this fund.
All things considered, when you see the S&P 500 has fallen about 1% over the past year, the BNDX fund looks pretty darn good with a 1% return.
As of this writing, Lawrence Meyers had no position in any security mentioned.