With interest rates sitting at historic lows, finding stable sources of high income remains the top priority for many investors, especially those who are entering their golden years. The go-to income investment for many portfolios has traditionally been U.S. Treasury bonds. Their safety and security has been well touted by the financial industry, and the bulk of investors' money still sits in broad-based Treasury funds and indexes. Exchange traded funds (ETFs) like the Vanguard Total Bond Market ETF (ARCA:BND) and iShares Barclays Aggregate Bond (ARCA:AGG), hold a combined $128 billion in investors' money.

SEE: How To Pick The Best ETF

Nevertheless, given that the hunt for income is becoming such an important piece of portfolio construction, investors just focusing on Treasury bonds are doing their portfolios a major disservice. Luckily, the proliferation of new exchange traded funds can provide just what these investors are looking for - high, stable sources of income.

The Search for Yield
With the global economy sluggishly plodding along and the Federal Reserve hinting at another round of quantitative easing, low interest rates are surely here to stay for a while. That's quite a problem for the millions of baby boomers who are getting ready to retire. Traditional CDs and money market funds are paying next to nothing and Treasury bond yields are barely compensating for inflation. All of these factors put pressure on a portfolio's ability to generate income and yield, right when the majority of investors need it the most.

SEE: Do Money-Market Funds Pay?

Exchange traded funds are daily trading baskets of bonds and stocks that offer plenty of choices to help retirees find new income solutions. Their targeted nature allows investors to directly add asset classes not found in broad Treasury funds or indexes. That could lead to other opportunities for yield, as well as provide access to uncorrelated and often-ignored bonds. Likewise, the generally low expenses of ETFs make them perfect for income-oriented portfolios, as these fees allow investors to keep more of those critical dividend payments. Add in intraday tradability and you have a recipe for retirement income success.

Adding Some Spice
For those investors who prefer to stick to the safety of the U.S. government, agency bonds could be a way to get additional yield. At their core, agency bonds are issued by various government entities, such as mortgage lenders Ginnie Mae and Freddie Mac. Agency bonds are essentially backed by the full faith and credit of the U.S. government. Thanks to this government affiliation, agency bonds receive favorable treatment in several cases, including being exempt from most state and local taxes. The broad-based iShares Barclays Agency Bond ETF (ARCA:AGZ) offers investors exposure to this area of the market. The fund offers a 1.4% yield, which at first glance may seem low. However, given the fund's low duration, that number is higher than similarly weighted treasury bonds.

SEE: Agency Bonds: Limited Risk And Higher Return

While most investors are familiar with tax-free municipal bonds, taxable munis do exist and these bonds could offer high, juicy yields. Created under the American Recovery and Reinvestment Act, Build America Bonds were designed as a way for states to help tap the constrained credit markets. When a government issues a BA Bond, it receives a cash subsidy from the federal government equal to 35% of the coupon rate on the bond. In exchange for that interest subsidy, Build America Bonds are taxable. With nearly $1 billion in assets, and offering a 4.86% yield, the PowerShares Build America Bond ETF (ARCA:BAB) should be investors' first stop to gain exposure to the asset class.

SEE: Build America Bonds: Should You Buy?

Just like companies in the United States, international firms need to tap the credit markets to raise money. Looking abroad for corporate bond exposure could pay off in a big way. The first ETF in this sector was the SPDR Barclays Capital Intl Corp Bond (ARCA:IBND). The fund tracks a basket of investment-grade issuers and yields 2.31%. Likewise, there are plenty of strong corporate contenders in the emerging market space that can be tapped via the new WisdomTree Emerging Markets Corporate Bond ETF (Nasdaq:EMCB).

The Bottom Line
The hunt for income remains a top priority for many investors these days. However, most bond portfolios barely hold anything except U.S. government bonds. That's a real shame, as there are plenty of additional options out there. Luckily, the ETF boom has made it easy for portfolios to add additional bond asset classes to an income portfolio. The previous examples are just a few of the many ways to do that.

At the time of writing, Aaron Levitt did not own any shares in any company mentioned in this article.

Related Articles
  1. Stock Analysis

    Starbucks: Profiting One Cup at a Time (SBUX)

    Starbucks is everywhere. But is it a worthwhile business? Ask the shareholders who've made it one of the world's most successful companies.
  2. Stock Analysis

    How Medtronic Makes Money (MDT)

    Here's the story of an American medical device firm that covers almost every segment in medicine and recently moved to Ireland to pay less in taxes.
  3. Investing News

    Latest Labor Numbers: Good News for the Market?

    Some economic numbers are indicating that the labor market is outperforming the stock market. Should investors be bullish?
  4. Investing News

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

    Should you seek high yielding-dividend stocks in the current investment environment?
  5. 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?
  6. 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?
  7. 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.
  8. 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.
  9. 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.
  10. 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.
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