3 Bond ETFs Every Retiree Should Own

Conventional wisdom suggest bonds are integral parts of a well-balanced investment portfolio, particularly for those investors who are nearing retirement or are already there. Exchange-traded funds have made it easier and more cost-effective for investors planning for retirement to bolster their fixed-income exposure.

3 Bond ETFs Every Retiree Should Own: HYD VCIT TOTL
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In fact, bond ETFs, even with all the speculation about rising interest rates, are among the fastest-growing corners of the ETF universe. Last year, two of the top 10 ETFs in terms of new assets added were bond ETFs. Today, about 20 of the largest funds by assets are bond ETFs.

There is a sticking point for investors considering bond ETFs this year — namely, the Federal Reserve — and expectations that after a modest rate hike in December, the U.S. central bank is targeting as many as three rate increases this year. Ten-year Treasury yields currently reside around 2.4% and some bond experts believe a move to 3% would market the end of the decades-long bull market for bonds.

That says investors who are planning for retirement need to be selective when it comes to these funds. Here are some ideas among bond ETFs to help retirement investors deal with the Fed’s whims in 2017.

Bond ETFs to Buy: VanEck Vectors High-Yield Municipal Index (HYD)

Bond ETFs to Buy: VanEck Vectors High-Yield Municipal Index (HYD)Expense ratio: 0.35%, or $35 on a $10,000 investment

Count municipal bonds among the asset classes that have become more accessible and cost-effective thanks to ETFs. Muni bonds have long been a favorite of retirement investors because these bonds are tax-exempt at the Federal level and, in many cases, free of state and local taxes as well. That means munis and the bond ETFs that hold them can best serve investors in taxable accounts, not tax-advantaged vehicles such as IRAs.

Despite a spate of municipal defaults in recent years, many caused by public pension obligations, municipal bonds are usually seen as a safe asset class. The rub with that safety is lower yields, indicating income-seeking retirement planners may want to consider a higher-yield option such as the Market Vectors ETF Trust (NYSEARCA:HYD).

The $1.8 billion HYD has a 30-day SEC yield of 4.5%. Over 29% of this bond’s ETF’s portfolio is rated investment-grade, but nearly 47% is rated junk.

To this point, HYD has not been hampered by public pension woes across the U.S., but investors mulling this bond ETF should note its almost 28% combined weight to California and Illinois, two states with significant pension issues.

Bond Funds to Buy: Vanguard Intermediate-Term Corporate Bond ETF (VCIT)

Bond Funds to Buy: Vanguard Intermediate-Term Corporate Bond ETF (VCIT)Expense ratio: 0.07%

A retirement bond portfolio does not need to be limited to Treasurys and other government bonds. High-grade corporate bonds can be part of that mix as well, and the Vanguard Intermediate Tm Cpte Bd ETF (NASDAQ:VCIT) is a compelling option for completing that objective.

As its name implies, VCIT is a medium-term bond fund, meaning its duration is not so long that this bond ETF is highly sensitive to interest rate changes. Conversely, VCIT is more sensitive to interest rate changes than a short-term or zero-duration bond ETF.

VCIT has an average duration of 6.4 years and an SEC yield of 3.4%, the latter of which is decent considering the moderate duration.

This bond ETF keeps with tradition of low Vanguard costs. With an annual fee of just 0.07%, is less expensive than 91% of rival bond ETFs. In December, Vanguard announced it lowered VCIT’s annual fee to 0.07% from 0.1%.

SPDR DoubleLine Total Return Tactical ETF (TOTL)

SPDR DoubleLine Total Return Tactical ETF (TOTL)Expense ratio: 0.55%

Yes, the SPDR DoubleLine Total Return Tactical ETF (NYSEARCA:TOTL) is pricier than traditional aggregate bond ETFs, but sometimes a higher fee is worth it. In this case, retirement investors get the benefit of active management courtesy of bond king Jeff Gundlach’s DoubleLine Capital.

Active management can prove advantageous with aggregate bond ETFs in a potentially tricky interest rate environment because passive bond ETFs competing with TOTL are often over-allocated to Treasurys. Conversely, TOTL has flexibility to move out of rate-sensitive areas of the bond market and lower duration as the fund’s managers deem appropriate.

TOTL currently devotes over 53% of its weight to mortgage-backed securities and 16.2% to Treasurys. The past six months illustrate TOTL’s advantages as this bond ETF has performed about 100 basis points less poorly than the largest passively managed aggregate bond ETFs over that period.

TOTL, which has a modified adjusted duration of just over five years, turns two next month and has over $3 billion in assets under management, making it one of the best, most successful ETFs to debut in 2015.

At the time of this writing, Todd Shriber did not own any of the aforementioned securities.


Article printed from InvestorPlace Media, https://investorplace.com/2017/01/bond-etfs-retiree-hyd-totl-vcit/.

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