If you are looking for more stability in your portfolio, exchange-traded funds that focus on bond holdings may be just the ticket. These funds offer both a low cost way to invest in a basket of fixed-income instruments and a steady stream of income.

Investors who may be flocking into cash should consider the opportunity to earn more interest on their dollars with a measured amount of additional risk offered by the following fixed-income ETFs. (For more about these vehicles, read Bond ETFs: A Viable Alternative.)

Fixed Income ETF Yield Year-to-Date
iShares Lehman TIPS Bond
5.91% 5.26%
Vanguard Short-Term Bond ETF
4.06% 3.00%
iShares Lehman Credit Bond
5.41% 0.81%
Data as of market close August 28, 2008

TIPS Bond - The Inflation Fighter
The iShares Lehman TIPS Bond ETF offers investors protection against a falling U.S. dollar. The more expensive goods and services become in the U.S., the more important it becomes for investors, especially those nearing retirement, to guard their portfolio against the erosive effects of inflation. The recent upswing of the U.S. dollar has pushed the TIPS Bond ETF down from its 52-week high in March, but its steady stream of income payments can make reading monthly income statements a little easier on the nerves. Investors interested in tracking the movements of the U.S. dollar can follow the PowerShares DB US Dollar Index Bullish (AMEX:UUP).

Near-Term Protection
The Vanguard Short-Term Bond ETF tracks the performance of the Lehman 1-5 Year U.S. Government/Credit Index. The index is composed of a variety of government, corporate and internationally denominated issues. Short-term bonds are less influenced by changes in interest rates, so future adjustments by the Federal Reserve should prevent major swings in the BSV ETF.

Investment Grade Tracker
The iShares Lehman Credit Bond seeks to return the performance of investment grade bonds as defined by the Lehman Brothers U.S. Credit Index. High quality bond holdings from Wells Fargo Bank (NYSE:WFC) and General Electric (NYSE:GE) Capital Corporation are among its top holdings. The majority of CFT's holdings are evenly split between short term (1-5 Year) and medium term (5-10 Year) bond holdings.

Final Thoughts
Among the three ETFs mentioned CFT has performed the worst over the past 12 months returning a negative -1.61% while the inflation fighter TIP performed the best returning 5.52%. Without a crystal ball I along with most others cannot predict the future movements of the market, but I can offer that investors in need of income or those with short time horizons should consider the utility of fixed income ETFs if cash is not their favored option.

For related reading with a mutual fund twist, read Bond Funds Boost Income, Reduce Risk.

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