Should I diversify the types of Bond ETFs I want to buy?

When buying bond ETFs, should I diversify the types of bonds, or can I buy three of strong performing corporate bond ETFs, such as the ones recommended in your article?

Bonds / Fixed Income, ETFs
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January 2017
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I'll make the assumption that you would like to keep things simple with your investing because you are interested in ETFs. There is good news. If you want to build out a diversified bond portfolio, you can do so with a small cohort of ETFs. There are several that track the Bloomberg/Barclays Aggregate Bond Index. This benchmark subsumes about 80% of the US public debt market. It's pretty comprehensive. The major bond asset classes that are omitted are treasury inflation-Linked securities (TIPs), junk bonds, and municipal bonds. These too are represented by low cost ETFs.

You could build a bond portfolio in a tax sheltered account that need not include tax-free municipal bonds. Use  AGG or BND to capture the broad investment grade market represented by the aggregate bond index. Both have management fees under 0.10%. Use TIP to include Treasury Inflation-Protected securities and HYG to invest in junk bonds. Passive bond portfolios are an excellent option in the fixed income markets. Morningstar issues an Active/passive Barometer twice a year to compare the performance of active managers against passive managers. The ten year results ended December 31st, 2015 and revealed that only 39.7% active bond managers outperformed their indexed counterpart funds.

There is bad news even for those managers that do beat their benchmark. Vanguard's latest Persistence Scorecard reveals that top quartile bond managers are no more likely to remain in that position than random chance would allow. In other words, there is no consistency in the quality of active bond management. You are well served to use a few ETFs to build out a bond portfolio.

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