The cash levels at large U.S. corporations continue to increase as many of them sit on the hordes of dollars. The cause of the cash levels rising, to their highest level in decades, could be based on several factors. One factor is the uncertainty surrounding the global economy, and therefore companies are more comfortable accumulating cash versus investing it in new capital projects or hiring. Another could be government regulation on industries, such as the financials where they are forced to increase capital and their cash balances. Whatever the reason may be, corporations are sitting on large amounts of cash, and it has resulted in strong balance sheets. This is just one reason I am a big fan of corporate bonds heading into next year. The large amounts of cash on the balance sheets of U.S. companies decreases the risk of default, and makes corporate bonds one of the safest investment vehicles available. Here are a few choices.

Investopedia Markets: Explore the best one-stop source for financial news, quotes and insights.

Investment Grade
The largest corporate bond exchange-traded fund (ETF) is the iShares iBoxx Investment Grade Corporate Bond ETF (ARCA:LQD), with over $16 billion in assets. A recent rally has the ETF at the best level in 8 years, as investors have been searching out yield and low volatility. The ETF has an average maturity of 12.14 years as it is composed of a mix of short-term and long-term corporate bonds. It is also important to note that the bonds in the ETF are all considered investment grade by the rating agencies. Year-to-date, the ETF is up 6%, easily beating the S&P 500, and the current yield is 4.0%. The ETF is composed of 713 individual bonds, and it charges an annual expense ratio of 0.15%.

Investors in search of less volatility, but want to gain exposure to the corporate bond sector, could consider the iShares 1-3 Year Credit Bond (ARCA:CSJ). The ETF invests in fixed income that has maturities between one and three years. The average maturity is 1.90 years. The ETF is up less than 0.5% on the year, and the current yield is 1.5%. Due to the short maturities, the result is less volatility and a lower yield. The expense ratio remains low at 0.20%, and there are 683 bonds in the allocation.

Vanguard offers three corporate bond ETFs that vary based on maturity: Vanguard Short-Term Corporate Bond ETF (Nasdaq:VCSH), Vanguard Intermediate-Term Corporate Bond ETF (Nasdaq:VCIT) and Vanguard Long-Term Corporate Bond ETF (Nasdaq:VCLT). The yields range from 2.3 to 4.8%, with VCLT boasting the highest yield. The expense ratio for all three ETFs is 0.15%. Based on performance in 2011, yield and expense ratio the best performing corporate bond ETF highlighted was VCLT. The Vanguard product is up 13% in 2011, and the yield is higher than LQD by 80 basis points. Past performance is not an indicator of future return, but with a higher yield and similar expense ratio, I would tend to lean towards VCLT if I were initiating a new position today.

The Bottom Line
Keep in mind that if the goal is to minimize volatility, and an above-average yield is not the main objective, the short-term maturity ETFs are the better choice. Consider CSJ or VCSH as investment options. (For more on choosing a bond for your portfolio, read Too Many Bonds To Choose From?)

Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!

At the time of writing, Matthew McCall did not own shares in any of the companies mentioned in this article.

Related Articles
  1. Mutual Funds & ETFs

    ETF Analysis: First Trust Dow Jones Global Sel Div

    Find out about the First Trust Dow Jones Global Select Dividend Index Fund, and learn detailed information about characteristics and suitability of the fund.
  2. Mutual Funds & ETFs

    ETF Analysis: U.S 12 Month Natural Gas

    Learn about the United States 12 Month Natural Gas Fund, an exchange-traded fund that invests in 12-month futures contracts for natural gas.
  3. Mutual Funds & ETFs

    ETF Analysis: iShares Floating Rate Bond

    Explore detailed analysis and information of the iShares Floating Rate Bond ETF, and learn how to use this ETF as a defense against rising interest rates.
  4. Mutual Funds & ETFs

    ETF Analysis: ProShares UltraPro Short S&P500

    Find out information about the ProShares UltraPro Short S&P 500 exchange-traded fund, and learn detailed analysis of its characteristics and suitability.
  5. Mutual Funds & ETFs

    ETF Analysis: SPDR Barclays Investment Grd Fl Rt

    Learn more about the SPDR Barclays Investment Grade Floating Rate Fund, which tracks an index of highly rated floating debt securities.
  6. Mutual Funds & ETFs

    ETF Analysis: ALPS Medical Breakthroughs

    Learn more about a unique and innovative exchange-traded fund (ETF) in the biotechnology industry: the ALPS Medical Breakthroughs Fund.
  7. Mutual Funds & ETFs

    ETF Analysis: iShares US Healthcare

    Learn about the iShares U.S. Healthcare exchange-traded fund, which invests in a wide range of health care providers, hospitals and home care facilities.
  8. Mutual Funds & ETFs

    Top 5 Japan Mutual Funds

    Discover five of the most popular and best-performing mutual funds offering investors direct exposure to equities of Japanese companies.
  9. Mutual Funds & ETFs

    ETF Analysis: BioShares Biotechnology Clinical Trials

    Learn more about the BioShares Biotechnology Clinical Trials Fund, a new and innovative fund focusing on breakthroughs in the health industry.
  10. Mutual Funds & ETFs

    ETF Analysis: First Trust NYSE Arca Biotech

    Learn more about the First Trust NYSE Arca Biotechnology Fund, a highly rated exchange-traded fund in the biotech space.
RELATED TERMS
  1. Equity

    The value of an asset less the value of all liabilities on that ...
  2. Exchange-Traded Fund (ETF)

    A security that tracks an index, a commodity or a basket of assets ...
  3. Exchange-Traded Mutual Funds (ETMF)

    Investopedia explains the definition of exchange-traded mutual ...
  4. Hard-To-Sell Asset

    An asset that is extremely difficult to dispose of either due ...
  5. Sucker Yield

    When an investor has essentially risked all of his capital for ...
  6. Lion economies

    A nickname given to Africa's growing economies.
RELATED FAQS
  1. How do dividends affect retained earnings?

    When a company issues a cash dividend to its shareholders, the retained earnings listed on the balance sheet are reduced ... Read Full Answer >>
  2. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  3. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
  4. What does a high turnover ratio signify for an investment fund?

    If an investment fund has a high turnover ratio, it indicates it replaces most or all of its holdings over a one-year period. ... Read Full Answer >>
  5. Does index trading increase market vulnerability?

    The rise of index trading may increase the overall vulnerability of the stock market due to increased correlations between ... Read Full Answer >>
  6. How does additional paid in capital affect retained earnings?

    Both additional paid-in capital and retained earnings are entries under the shareholders' equity section of a company's balance ... Read Full Answer >>

You May Also Like

COMPANIES IN THIS ARTICLE
Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!