Several profitable and popular intermediate bond exchange-traded funds (ETFs) are available to investors. Among these are the iShares 7-10 Year Treasury Bond ETF, the Intermediate-Term Bond ETF, the Intermediate-Term Corporate Bond Index Fund and the iShares Intermediate Credit Bond ETF.
An intermediate-term bond is a fixed-income security with a date of maturity or a date by which principal repayment must occur. In general, an intermediate-term bond will typically have a maturity date scheduled to occur within three to 10 years. The exact parameters for an intermediate-term bond are not written in stone and can be somewhat difficult to define. Some experts indicated that the term of these intermediate-term bonds could last as long as 15 years. The length of time, though not strictly determined, is important because it is the point at which a bond fully restores payment of the bond’s face value to the investor. During the duration of the bond, investors earn interest until the date of maturity.
Bonds are investments for the portfolios of fixed-income investors. Financial consulting firm Aon Hewitt indicates that intermediate-term bonds, often in the form of ETFs, are common investment elements in a 401(k). When market conditions are normal, and when the yield curve is positive, intermediate-term bonds generally offer higher yields than short-term bonds. An intermediate-term bond ETF provides an effective approach to investing in bonds that have been issued by a variety of governments and corporations.
iShares 7-10 Year Treasury Bond ETF
Issued by BlackRock in 2002, the iShares 7-10 Year Treasury Bond ETF (NYSEARCA: IEF) tracks the Barclays U.S. 7-10 Year Treasury Bond Index. This underlying index is market-weighted and composed of debt issued by the U.S. Treasury. To qualify for a spot in this fund’s basket, the total remaining years of maturity on each bond must equal a minimum of seven but be no greater than 10. All coupon strip Treasuries are excluded.
The weighted average maturity for this fund is 8.5 years. Because IEF has a longer average maturity, it has a longer duration play on the U.S. Intermediate Treasury segment. More than 90% of this fund’s assets are in the form of Treasury notes that expire between seven and 10 years from the current date. The yield to maturity of this fund is one of the highest in the fixed-income segment. This higher yield, however, brings with it a much greater sensitivity to changes in rates, specifically rates at the longer end of the yield curve. Thus, IEF is best suited to investors comfortable with a greater level of rate-fluctuation risk. IEF is among the easiest intermediate-bond ETFs to trade and holds great favor among investors because of the portfolio’s concentrated and narrow focus.
The expense ratio for this fund is approximately 0.15%. The current yield to maturity is 2.11%. The five-year annualized return for this fund is approximately 3.9%. IEF has more than $8 billion in total assets under management. Morningstar gives IEF an average rating for returns and a below-average rating for risk. At present, the entirety of this fund’s holdings is composed of U.S. Treasury bonds.
Intermediate-Term Bond ETF
Issued in 2007 by Vanguard, the Intermediate-Term Bond ETF (NYSEARCA: BIV) tracks the Barclays U.S. 5-10 Year Government/Credit Float Adjusted Index. This underlying index is market-weighted and is composed of all investment-grade fixed-income bonds with maturity dates at least five years but no more than 10 years from the present date. BIV has only one other competitor in the intermediate government and credit segment. It is much larger and much more liquid than its competitor, the iShares Intermediate Government/Credit Bond ETF (GVI). It also has much lower fees.
BIV distinguishes itself from GVI in two ways. First, at more than $40 million, BIV has a substantially larger daily trading volume. Second, this fund has a slightly different take on how it defines intermediate maturity. For this fund, bonds are considered for the intermediate bucket with a minimum maturity date of five years. This is different than the more traditional one- or three-year minimum. Thus, BIV has a longer average maturity and therefore, a longer effective duration period. Having a longer-dated portfolio culminates in increased interest-rate risk for the fund and a current yield to maturity of approximately 2.7%.
This fund has a total of more than $7.4 billion in assets under management. The expense ratio for this fund is low at 0.1%. The fund’s five-year annualized return is approximately 4.3%. Morningstar gives BIV a high-risk rating but also gives the fund an above-average rating on return performance. The largest portion of this ETF is composed of U.S. Treasury bonds.
Intermediate-Term Corporate Bond Index Fund
Issued by Vanguard in 2009, the Intermediate-Term Corporate Bond Index Fund (NYSEARCA: VCIT) tracks the Barclays U.S. 5-10 Year Corporate Bond Index. The fund’s underlying index is market-weighted and is composed of investment-grade fixed-rate corporate bonds that have minimum and maximum maturities of five and 10 years, respectively. VCIT defines intermediate corporate bonds as those with a maturity date within five to 10 years of the current date. Because of this, the fund has a significantly longer weighted average maturity than most of the other intermediate-term ETFs in the fixed-income corporate investment segment.
This fund also has a longer effective duration than the majority of these other funds. It does, however, have a yield to maturity that is one of the highest among those same funds. In terms of sector coverage, VCIT is notably market-like; the industrials sector holds more than 60% of asset allocation. In the segment, this fund has one of the lowest expense ratios and is among the most liquid. Thus, VCIT is well suited to investors looking for a balanced exposure to the investment-grade corporate bond space with a five- to 10-year maturity pocket.
This fund’s assets under management total more than $6 billion. At 0.12%, it has an incredibly low expense ratio. The current yield to maturity is 3.65%. This fund’s five-year annualized return is approximately 4.9%. Morningstar gives VCIT an above-average risk rating but also gives the fund an above-average rating for a return performance. Top holdings for this fund include JPMorgan Chase & Company, Bank of America Corporation and Verizon Communications.