In the world of exchange-traded funds (ETFs), equity funds are the dominant group, but advisors and investors are increasingly willing to fill out the fixed income portions of their portfolios with bond ETFs. Last year, nearly bond ETFs set an inflows record, capturing nearly a third of all U.S. ETF inflows.
Bond ETFs are on a torrid asset-gathering pace again in 2019. Year-to-date, five of the top 10 ETFs in terms of new assets added are bond ETFs and investors’ pensiveness on the rise, bond ETFs could continue packing on new assets over the coming months.
Adding to the case for bond ETFs, particularly those with long durations, is that the Federal Reserve appears likely to hold off on raising interest rates this year. Some bond market observers are even speculating that an interest rate cut could occur later this year. While it may be prudent to expect an interest rate cut, even if the Fed simply stands pat on rates, that could benefit a slew of bond ETFs.
For investors looking for safety plays or to boost their income streams, here are some bond ETFs to consider.
Bond ETFs: WisdomTree Yield Enhanced U.S. Short-Term Aggregate Bond Fund (SHAG)
Expense Ratio: 0.12% per year, or $12 on a $10,000 investment.
The WisdomTree Yield Enhanced U.S. Short-Term Aggregate Bond Fund (CBOE:SHAG) is a bond ETF for investors to consider if, for some reason, the Fed surprisingly reverses course and decides to raise rates again because SHAG has an effective duration of just 2.65 years. Lower duration bond ETFs are less sensitive to changes in interest rates, explaining why so many of these bond ETFs were popular in 2018 when the Fed boosted borrowing costs four times.
SHAG’s 30-day SEC yield of 2.73% is decent when considering investors are not incurring much risk with this bond ETF. That yield is boosted by a 55.37% weight to corporate bonds, while the rest of SHAG’s holdings are U.S. government and agency debt. That means credit risk is mostly low with this fund, as highlighted by more than 40% of SHAG’s holdings carrying AAA ratings. None of SHAG’s holdings carry junk ratings.
While it appears unlikely interest rates will rise, SHAG still merits consideration over the near-term due to its conservative posture and steady income stream.
SPDR ICE BofAML Broad High Yield Bond ETF (CJNK)
Expense Ratio: 0.15%
Cheap ETFs are available in all shapes and sizes and that includes junk bond funds. In fact, the SPDR ICE BofAML Broad High Yield Bond ETF (NYSEARCA:CJNK) was recently converted into one of the least expensive junk bond ETFs on the market after being a different kind of corporate bond fund. While many investors think of junk bonds as risky, this asset class is suitable for myriad portfolios and investment objectives.
“High yield is an asset class that should be at the center of any income-generating portfolio, just by virtue of it carrying a yield 63% higher than that of the combined yield of global aggregate bonds and global equities, on average, over the past 20 years,” according to State Street research.
CJNK has an option-adjusted duration of 3.61 years and holds over 1,000 junk bonds. This low-cost bond ETF has a 30-day SEC yield of 6%.
VanEck Vectors Green Bond ETF (GRNB)
Expense Ratio: 0.3%
For investors looking to implement socially responsible investing principles in the fixed income portions of their portfolios, the VanEck Vectors Green Bond ETF (NYSEARCA:GRNB) is a bond fund to consider. A simple definition of green bonds is that these bonds are issued to finance environmentally friendly projects.
GRNB’s underlying index “is comprised of labeled green bonds that are issued to finance environmentally friendly projects, and includes bonds issued by supranational, government, and corporate issuers globally in multiple currencies,” according to VanEck.
Many issuers of green bonds are large, developed market governments, meaning GRNB’s credit risk is low. About two-thirds of the fund’s 188 holdings are rated AAA, AA or A. GRNB has a duration of 6.45 years. The green bond market is expected to grow exponentially in the years ahead.
“The first quarter of 2019 saw a welcome boost in green bond supply, totaling over $40 billion, which is up approximately 46% versus the same period one year ago,” said VanEck in a recent note. “North American issuance was up approximately 30%, with green bonds from first time corporate issuers including Verizon and Citigroup as well as repeat issuance from companies such as Duke Energy and MidAmerican Energy.”
Schwab Short-Term U.S. Treasury ETF (SCHO)
Expense Ratio: 0.06%
The Schwab Short-Term U.S. Treasury ETF (NYSEARCA:SCHO) is a bond ETF for conservative, cost-conscious investors. As its name implies, SCHO holds Treasuries, so there is essentially no credit risk with this fund.
“Indexing Treasuries in this way is a sound approach for exposure to a specific portion of the yield curve,” said Morningstar in a recent note on SCHO. “It is difficult for active managers to recoup their fees while offering comparable exposure to Treasuries on this narrow segment of the yield curve, as Treasuries are one of the most competitively priced areas of the bond market and managers have little leeway to take additional duration risk.”
SCHO’s effective duration is just 1.93 years. In other words, SCHO’s selling points are low credit risk, low rate risk and a low fee. The first two of those points also mean a somewhat low yield (2.32%), but that is the trade-off for reducing credit and interest rate risk.
Vanguard Total International Bond ETF (BNDX)
Expense Ratio: 0.09%
The Vanguard Total International Bond ETF (NASDAQ:BNDX) has several factors that make it a compelling choice among bond ETFs. As is the case with so many Vanguard funds, BNDX qualifies as a cheap ETF. In fact, investors would be hard-pressed to find a cheaper international bond ETF.
Second, BNDX provides investors with some international diversification, a trait that often goes overlooked in bond portfolios. Third, BNDX uses a currency hedge to provide a buffer against weakness in currencies that the fund’s holdings are denominated. Home to more than 5,600 bonds, BNDX is also one of the largest bond ETFs in terms of roster size.
BNDX has slight emerging markets exposure and the bulk of its geographic exposure is allocated among developed Europe and the Asia-Pacific region. Japan, France and Germany combine for 43.2% of this Vanguard fund’s weight. BNDX has an average duration of 7.9 years and is one of this year’s most popular bond ETFs as highlighted by inflows of $3.43 billion, good for the ninth-best tally among U.S.-listed ETFs.
Vanguard Intermediate-Term Corporate Bond ETF (VCIT)
Expense Ratio: 0.07%
The Vanguard Intermediate-Term Corporate Bond ETF (NASDAQ:VCIT) is one of the dominant names among intermediate-term corporate bond ETFs. One of the lowest fees in the category is a help, as is the fund’s investment-grade portfolio.
VCIT holds 1,770 bonds with an average duration of 5.8 years. Over 94% of the fund’s holdings are rated A or Baa. VCIT has a 30-day yield of 3.6%, which is above what investors find with Treasury funds of comparable durations. This Vanguard fund is outperforming the largest corporate bond ETF by about 40 basis points over the past 12 months.
Advisors and investors are certainly taking notice. As of May 9, VCIT’s year-to-date inflows were $4.39 billion, good for the top spot among bond ETFs and the fourth spot overall among U.S.-listed ETFs.
Invesco Corporate Income Value ETF (IHYV)
Expense Ratio: 0.23%
At just under a year old, the Invesco Corporate Income Value ETF (NYSEARCA:IHYV) is a hidden gem among corporate bond ETFs, presenting investors with a value play on corporate bonds with non-investment-grade ratings. This bond ETF tracks the Invesco High Yield Value Index.
That benchmark is “designed to provide exposure to higher value, U.S. high yield bonds and bonds with the lowest credit rating considered investment grade,” according to Invesco. “Higher value bonds are characterized as those with higher yields that may provide greater returns in certain markets. In addition, the Index seeks to incorporate securities with the highest quality scores within the eligible universe of U.S. bonds.”
IHYV features scant exposure to highly speculative CCC-rated debt (3% of the portfolio), but the fund is somewhat levered to oil prices because energy issues represent over 22% of IHYV’s weight. Investors are compensated for the risk that comes along with this bond ETF with a 30-day SEC yield of 6.50%. IHYV has an effective duration of 4.04 years.
As of this writing, Todd Shriber did not own any of the aforementioned securities.