Which of These Bond ETFs Is Right For You?

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The creation of bond ETFs have made it easier for investors to gain exposure to the bond market and fixed income. Bonds are debt securities, similar to a loan or IOU. The purchaser of a bond generally receives some form of interest payment or depending on the agreement they’ll get their principal back at a later date, known as the maturity date.

Now, when it comes to buying government bonds its fairly straight forward. All you need to do is hop online to TreasuryDirect.gov , and you then have the choice between T-bills, T-bonds, and T-notes. However, the government is not the only entity that issues bonds. For example, corporations also issue bonds to raise capital.

That said, bonds have traditionally been considered safe haven investments, especially government bonds. And according to Moody’s Investor Service, the global bond default rate for speculative grade debt in the U.S. was below 5% in 2017.

There are hundreds of bond ETFs that investors can select from. Let’s take a look at some of the more popular ones.

bond etf

Top Junk Bond ETFs

Junk bonds are high yield debt securities that are typically issued by corporations to raise capital. The term “junk” refers to the credit rating off the bonds. A junk bond will have a credit rating of BB or lower by Standard & Poor’s, or below Ba by Moody’s Investors Service. Since they have low ratings, the chances of default are higher compared to investment-grade bonds.

SPDR Bloomberg Barclays High Yield Bond ETF (NYSE: JNK) seeks to replicate the returns of the Bloomberg Barclays High Yield Very Liquid Index.

Benefits include a diversified exposure to US dollar-denominated high yield corporate bonds with above-average liquidity. It’s also more cost-efficient than buying individual bonds.

jnk bond etf

Source: State Street Global Advisors

The fund is allocated primarily in corporate bonds in the industrial space. In addition, the majority of the bonds in the fund have a B or BB rating.  The fund maturity ladder consists mainly of: 3-5 years; 5-7 years; and 7-10 years respectfully.

iShares iBoxx $ High Yield Corporate Bond ETF (NYSE: HYG) attempts to replicate the performance of an index composed of U.S. dollar-denominated high yield corporate bonds.

hyg bond etf

Source: BlackRock

Sectors in which the fund has its main exposure to is: communications, consumer non-cyclical, energy, and consumer cyclical.

Most of the bonds in the portfolio mature in: 3-5 years, 5-7 years, and 7-10 years.  The credit quality of the bonds mainly consist of BB and B rating corporate bonds.

Best Government Bond ETFs

Government bonds are considered to be one of the safest investments. After all, the chances of the U.S. government defaulting is very low.

iShares 7-10 Year Treasury Bond ETF (NYSE: IEF) seeks to replicate the performance of an index composed of U.S. Treasury bonds with remaining maturities between 7 to 10 years.

ief bond etf

Source: BlackRock

This treasury bond ETF is one of the most actively traded among traders, with average daily trading volumes exceeding 3M. In addition, the fund pays investors an annual dividend of $1.93 per share.

iShares 20+ Year Treasury Bond ETF (NASD: TLT)  attempts to replicate the returns of an index composed of U.S. Treasury bonds with remaining maturities greater than 20 years.

This treasury bond trades more than 10M shares on average. It pays investors an annual dividend of $3.07 per share.

iShares US Treasury Bond ETF (AMEX: GOVT) attempts to replicate the results of an index composed of U.S. Treasury bonds. It gives investors exposure to U.S. Treasuries ranging from 1-30 year maturities.

The fund pays investors an annual dividend of $0.41 per share. The average volume exceeds 1M shares per day. It’s better suited for investors than traders because it doesn’t experience a great deal of volatility.

Investment Grade Bond ETFs

An investment grade corporate bond is one that receives a strong rating from the rating agencies. For example, bonds that are rated BBB, A, AA, and AAA are considered investment grade bonds.

iShares iBoxx $ Investment Grade Corporate Bond ETF (NYSE: LQD) seeks to replicate the performance of an index composed of U.S. dollar- denominated, investment grade corporate bonds.

lqd bond etf

Source: BlackRock

One of the benefits investors get from the fund is diversification. There are over 1,000 high quality corporate bonds in the fund. The bonds in the fund consist mainly of BBB rated and A rated bonds. More than half of the bonds in the fund mature between 3 to 10 years. However, 26% of the bonds have maturities of 20 years or more.

Investors of the fund receive an annual dividend of $3.77 per share. It’s actively traded with an average daily volume that exceeds 7M shares.

iShares Core US Aggregate Bond ETF (NYSE: AGG) attempts to replicate the performance of an index composed of the total U.S. investment-grade bond market.

agg bond etf

Source: BlackRock

The primary sectors the fund invests in are: treasury, MBS pass-through, industrial, and financial institutions.

The pays out an annual dividend of $2.56 per share. It’s actively traded with more than 4M shares traded on an average day. Despite the strong volume, volatility in the fund is low, making it more suitable for investing than it is for day trading.

Emerging Market Bond ETFs

iShares JP Morgan USD Emerging Markets Bond ETF (NASD: EMB) attempts to replicate the performance of an indexs composed of U.S. dollar-denominated, emerging market bonds.

It gives investors exposure to U.S. dollar-denominated government bonds issued by emerging market countries. There are more than 30 emerging market countries in the fund.

emb bond etf

Source: BlackRock

Investors of the fund receive an annual dividend of $5.13.  On average 3M shares of the fund trade on a daily basis.

VanEck Vectors J.P. Morgan Emerging Markets Local Currency Bond ETF (NYSE: EMLC) seeks to replicate the performance of the J.P. Morgan GBI-EMG Core Index, comprised of bonds issued by emerging market governments and denominated in the local currency of the issuer.

emlc bond etf

Source: VanEck

The fund pays its investors an annual dividend of $1.02 per share and is actively traded with more than 3M shares traded daily on average.

Bottom Line

Bonds are fixed income securities. Investors gain access to several different types of bonds via bond ETFs. The relationship between bonds and stocks can be positive or negative. It’s normal to see bonds rise when stocks do and vice versa. However, in recent times the relationship has been negative.

Investors should be looking at the overall health of the stock market and the economy before deciding to invest in a bond ETF. Of course, it’s important to track what the Federal Reserve Bank is doing with its interest rate policy. When interests rise, the price of bonds drop. Every bond carries interest rate risk.

During periods of uncertainty, investors will flock into bonds because they have been traditionally considered safe haven investments.

As with any ETF investment, make sure to do your due diligence and read the funds prospectus.

 

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