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 812 different short term investment grade corporate, and non-U.S. Agency bonds. The funds current 30-day SEC yields about 1.26%, 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 362 bonds from various places around the globe including Canada, Germany and Japan. The funds current dividend yield is roughly 3.94%.

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.

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

Related Articles
  1. Investing

    How ETFs May Save You Thousands

    Being vigilant about the amount you pay and what you get for is important, but adding ETFs into the investment mix fits well with a value-seeking nature.
  2. Mutual Funds & ETFs

    3 Fixed Income ETFs in the Mining Sector

    Learn about the top three metals and mining exchange-traded funds (ETFs), and explore analyses of their characteristics and how investors can benefit from these ETFs.
  3. Chart Advisor

    Agriculture Commodities Are In The Bear's Sights

    Agriculture stocks have experienced strong moves higher over recent weeks, but chart patterns on sugar, corn and wheat are suggesting the moves could be short lived.
  4. Investing News

    Top Tips for Diversifying with Mutual Funds

    Are mutual funds becoming obsolete? If they have something to offer, which funds should you consider for diversification?
  5. Professionals

    Top Stocks to Short, Go Long On to Beat the Market

    A long/short portfolio can help weather a variety of market scenarios. Here's how to put one together.
  6. Mutual Funds & ETFs

    Top 4 Asia-Pacific ETFs

    Learn about four of the best-performing exchange-traded funds, or ETFs, that offer investors exposure to the Asia-Pacific region.
  7. Mutual Funds & ETFs

    Top 3 Japanese Bond ETFs

    Learn about the top three exchange-traded funds (ETFs) that invest in sovereign and corporate bonds issued by developed countries, including Japan.
  8. Mutual Funds & ETFs

    What Exactly Are Arbitrage Mutual Funds?

    Learn about arbitrage funds and how this type of investment generates profits by taking advantage of price differentials between the cash and futures markets.
  9. Savings

    Become Your Own Financial Advisor

    If you have some financial know-how, you don’t have to hire someone to advise you on investments. This tutorial will help you set goals – and get started.
  10. Investing News

    Ferrari’s IPO: Ready to Roll or Poor Timing?

    Will Ferrari's shares move fast off the line only to sputter later?
  1. Can mutual funds invest in IPOs?

    Mutual funds can invest in initial public offerings (IPOS). However, most mutual funds have bylaws that prevent them from ... Read Full Answer >>
  2. 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 >>
  3. 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 >>
  4. 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 >>
  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. 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 >>

You May Also Like

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!