Bonds are gaining in popularity due to their placement in bankruptcy proceedings. As investors are toning down their risk, being higher on the food chain, so to speak, fixed income investing is one way to do this. In a worst-case scenario such as bankruptcy, the creditors and bondholders usually get at least some of their money back, while shareholders often lose their entire investment. Bonds can also be very efficient at smoothing out volatility and preserving capital. The regular income distributions bonds generate help cushion downside while still providing upside. Investors are flocking to bond ETF for their tax efficiency, low operating costs and transparency of ownership. These ETFs often make quarterly distributions, rather than semi or annual payments, unlike individual debt offers. The diversification benefits alone make ETFs one of the best investment vehicles out there for both institutional and retail investors.

Investopedia Broker Guides: Enhance your trading with the tools from today's top online brokers.

A Simple Fixed-Income Portfolio
While a broad based "catch all" bond ETF such as the iShares Barclays Aggregate Bond (ARCA:AGG), which owns over 1500 various bonds is a good low-cost choice for many portfolios (expense ratio of 0.22%), investors wanting to take a more hands-on approach to their fixed-income assets have several choices. Investors wanting to take full advantage of the various credit types and maturity timelines can build a quality portfolio that will keep up with rising interest rates and throw off enough income. Here is a simple fixed-income approach using some of the more popular and cheaper funds.

Bond ETF Choices
It's almost a guarantee that the Federal Reserve will raise interest rates sometime in the near future, although the next date is uncertain. In order to take advantage of this fact, investors should keep their maturities short. These short term bonds tend to lose less than bonds of longer timelines. Corporate bonds traditionally pay larger coupons due to their "riskier' nature. The iShares Barclays 1-3 Year Credit Bond (ARCA:CSJ) follows roughly 684 different short term investment grade corporate, and non-U.S. Agency bonds. The funds current 30-day SEC yields about 1.24%, but as rates rise, so will the ETF's yield. A dose of short term United States Treasury bonds from the iShares Barclays 1-3 Year Treasury (ARCA:SHY) will help increase the safety level.


Just as the U.S government issues treasury bonds, so do other nations around the world. Adding a weighting of these international bonds will help protect the portfolio against a potentially falling dollar. The SPDR Barclays Capital International Treasury (ARCA:BWX) holds roughly 667 bonds from various places around the globe including Canada, Germany and Japan. The fund current 30-day SEC yields 1.71%.

With the worst of the recession behind us, adding a weighting of high-yielding junk bonds makes sense as a growing economy should help keep defaults at a minimum. This fund will also bring up the overall income yield of the portfolio. The SPDR Barclays Capital High Yield Bond (ARCA:JNK) fits the bill.

SEE: An Introduction To Corporate Bond ETFs

Bottom Line
It seems these days that everyone is adding a bigger percentage of bonds to their portfolio. ETFs make it easy to add diverse fixed-income assets to a portfolio. The preceding bond ETFs are a good example of a starter bond allocation.

Related Articles
  1. Investing News

    Stocks with Big Dividend Yields: 'It's a Trap!'

    Should you seek high yielding-dividend stocks in the current investment environment?
  2. Investing News

    Should You Be Betting with Buffett Right Now?

    Following Warren Buffett's stock picks has historically been a good strategy. Is considering his biggest holdings in 2016 a good idea?
  3. Products and Investments

    Cash vs. Stocks: How to Decide Which is Best

    Is it better to keep your money in cash or is a down market a good time to buy stocks at a lower cost?
  4. Investing News

    Who Does Cheap Oil Benefit? See This Stock (DG)

    Cheap oil won't benefit most companies, but this retailer might buck that trend.
  5. Investing

    How to Ballast a Portfolio with Bonds

    If January and early February performance is any guide, there’s a new normal in financial markets today: Heightened volatility.
  6. Stock Analysis

    Performance Review: Emerging Markets Equities in 2015

    Find out why emerging markets struggled in 2015 and why a half-decade long trend of poor returns is proving optimistic growth investors wrong.
  7. Investing News

    Today's Sell-off: Are We in a Margin Liquidation?

    If we're in market liquidation, is it good news or bad news? That party depends on your timeframe.
  8. Investing News

    Bank Stocks: Time to Buy or Avoid? (WFC, JPM, C)

    Bank stocks have been pounded. Is this the right time to buy or should they be avoided?
  9. Stock Analysis

    Why the Bullish Are Turning Bearish

    Banks are reducing their targets for the S&P 500 for 2016. Here's why.
  10. Stock Analysis

    How to Find Quality Stocks Amid the Wreckage

    Finding companies with good earnings and hitting on all cylinders in this environment, although possible, is not easy.
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