Which Bond ETF should I invest in?
I manage my own brokerage account online. I am a big fan of two Bond ETFs with similar characteristics (both long term securities). One has a slightly higher SEC Yield than the other, and have marginally different premiums/discounts. Which one would you pick for your portfolio? Why?
It's highly unlikely that there's really much difference.
If you are looking for an ETF with fixed-income-like risk, look at preferred stocks. The biggest fund in the sector is put out by iShares, symbol PFF. Current yield is about 5.6% and the risk profile is more or less like long term corporate bonds. It pays a variable monthly dividend and some of the dividends are QDI.
If you are under 50 with an income that you expect to grow, I think it is foolish to hold bonds.
Thanks for the interesting question on bond ETF's. It is difficult to answer the question without knowing the specifics of your portfolio and the ETF's. My suffestion is to look at each ETF and the specific holdings of the entity and examine what are the largest percentages of the fund allocated to. If they are corporate bond funds, you are owning the debt securities of specific issuers so find out what the largest ones are in the fund. Look at the yields and prices of the debt and consider whether or not you believe these companies will continuing paying these debt obligations, and whether the specific issuer has a business which might improve. If they are bond funds with a mix of corporate and government issuers, again, look at the heaviest weighted holdings and determine if this is debt you have a high confidence will be paid, and why. The yields are a function of the price, and vice versa, and ultimately, how the issuer's business is doing, or municipality or government entity performs financially, so that has to be the prime consideration. For example, you probably don't want to see the state of Illinois general obligation bonds in these funds because of the states financial consideration. I hope this helps answer your questiona and good luck with this situation.
Yale Bock, CFA
Y H & C Investments
Since I don't have information about the specific funds you are considering, everything here is hypothetical. That being said, in general, I would pick the one with the lower expense ratio, the higher amount of assets and with the strategy that best fits your investment goals. Simpy stated, because bonds don't generally generate much capital appreciation across time, minimizing costs will help you maximize your returns. Liquidity is also an issue, so I generally like larger funds as they tend to be more liquid, and those that have a longer track record so you can really judge the past peformance. That being said, if both funds have the same strategy and track the same indicies, I would take the one with lower costs and greater liquidity (higher assets.)
I am glad you have some fixed income in your portfolio as that is frequently neglected. With that in mind, as mentioned already, worthwhile information is lacking here. Are you using only 1 etf for your FI exposure? Is this a taxable or tax deferred account? Why only longterm bonds?
I'll fill in the blanks here in the hopes I land somewhere inthe neighborhood.
If you are only using one ETF ( probably not ideal) consider a total bond approach, like BND or BOND. The duration of those bonds is much lower than LT bonds but you are getting most of the yield with lower volatility.
If this is taxable money and you are in a higher tax bracket consider a solid allocation to MUB or other national muni etfs, assuming there are no state taxes you pay. If so many of the larger issuing states also have state specific etfs. But don't use all the allocation on a state specific etf as it entails unnecessary risk.
For what it's worth I diversify my bond holdings as follows: IEF, BOND, TIP and VWOB. I do not use junk bonds in the fixed income allocation is it really is a proxy for stocks and belongs in the stock allocation.
I hope you gained some value from my thoughts.