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

    ETFs Can Be Safe Investments, If Used Correctly

    Learn about how ETFs can be a safe investment option if you know which funds to choose, including the basics of both indexed and leveraged ETFs.
  2. Mutual Funds & ETFs

    The Top 5 Large Cap Core ETFs for 2016 (VUG, SPLV)

    Look out for these five ETFs in 2016, and learn why investors should closely watch how the Federal Reserve moves heading into the new year.
  3. Economics

    India: Why it Might Pay to Be Bullish Right Now

    Many investors are bullish on India for all the right reasons. Does it present an investing opportunity?
  4. Stock Analysis

    Analyzing Altria's Return on Equity (ROE) (MO)

    Learn about Altria Group's return on equity (ROE) and analyze net profit margin, asset turnover and financial leverage to determine what is causing its high ROE.
  5. Investing Basics

    Building My Portfolio with BlackRock ETFs and Mutual Funds (ITOT, IXUS)

    Find out how to construct the ideal investment portfolio utilizing BlackRock's tools, resources and its popular low-cost exchange-traded funds (ETFs).
  6. Investing News

    Icahn's Bet on Cheniere Energy: Should You Follow?

    Investing legend Carl Icahn continues to lose money on Cheniere Energy, but he's increasing his stake. Should you follow his lead?
  7. Stock Analysis

    Analyzing Google's Return on Equity (ROE) (GOOGL)

    Learn about Alphabet's return on equity. How has its ROE changed over time, how does it compare to its peers and what factors are driving ROE for the company?
  8. Investing News

    Is Buffett's Bet on Oil Right for You? (XOM, PSX)

    Oil stocks are getting trounced, but Warren Buffett still likes one of them. Should you follow the leader?
  9. Investing

    3 Things About International Investing and Currency

    As world monetary policy continues to diverge rocking bottom on interest rates while the Fed raises them, expect currencies to continue their bumpy ride.
  10. Investing News

    Chipotle Served with Criminal Probe

    Chipotle's beat muted expectations and got a clear bill from the CDC, but it now appears that an investigation into its E.coli breakout has expanded.
RELATED FAQS
  1. Should mutual funds be subject to more regulation?

    Mutual funds, when compared to other types of pooled investments such as hedge funds, have very strict regulations. In fact, ... Read Full Answer >>
  2. Do ETFs pay capital gains?

    Exchange-traded funds (ETFs) can generate capital gains that are transferred to shareholders, typically once a year, triggering ... Read Full Answer >>
  3. How do real estate hedge funds work?

    A hedge fund is a type of investment vehicle and business structure that aggregates capital from multiple investors and invests ... Read Full Answer >>
  4. Are Vanguard ETFs commission-free?

    While some Vanguard exchange-traded funds (ETFs) are available commission-free from third-party brokers, a large portion ... Read Full Answer >>
  5. Do Vanguard ETFs require a minimum investment?

    Vanguard completely waives any U.S. dollar minimum amounts to buy its exchange-traded funds (ETFs), and the minimum ETF investment ... Read Full Answer >>
  6. Can mutual fund expense ratios be negative?

    Mutual fund expense ratios cannot be negative. An expense ratio is the sum total of all fees charged by an asset management ... Read Full Answer >>
COMPANIES IN THIS ARTICLE
Trading Center