Mike Larson: In all my years of following the interest rate markets, I can’t recall a moment like this. The so-called “experts” on Wall Street are completely, utterly obsessed with a simple question: “Will Fed officials wave their magic monetary wand again or won’t they?” Read more…
Chris Ciovacco: Leaders from both parties in Washington are playing a dangerous political game with the nation’s AAA credit rating. The first self-imposed deadline of July 22 to have a framework of a debt-ceiling deal in place has already passed. The second and firmer deadline of August 2 is a Read more…
We had technological difficulties in Maine, however, and couldn’t get the satellite hookup going in time.
Even so, I thought it might be interesting to share the portfolio we were going to discuss. It brings up both an important as well as an interesting topic.
According to Wikipedia, “Reflation is the act of stimulating the economy by increasing the money supply or by reducing taxes. It is the opposite of disinflation. It can refer to an economic policy whereby a government uses fiscal or monetary stimulus in order to expand a country’s output.”
Reflation is not necessarily good or bad, of course. The response from the Fed, the Treasury and Congress over the past few quarters probably saved us from a more crushing recession/potential depression. Read more…
These are trying times for income oriented investors. Interest rates are still stuck at record low levels which means lower income generated from bonds and other fixed income investments.
U.S. Treasuries with a 10-year maturity are yielding just 3.20%, which isn’t much over the lifetime of the investment, especially after deducting the cost of taxes and any potential for re-inflation. The interest rates being paid by bank certificates of deposit (CDs) is also down. According to BankRate.com, today’s national average 1-year rate for bank CDs is just 2.20%.What can bond investors do?
Bonds, like stocks, come in many different varieties. Government bonds are issued by U.S. or foreign governments, municipal bonds are issued by cities, states and local governments, corporate bonds are issued by companies and there are also asset-backed securities, mortgage backed securities and convertible bonds along with Treasury Inflation Protected Securities (TIPS). Diversifying your bond portfolio is one strategy to gain more income and to reduce market risk.
Let’s briefly evaluate 5 bond ETFs that can help you to generate more income from your bond investments.
iShares Barclays Aggregate Bond Index Fund (NYSEArca: AGG)
The performance and yield of AGG are linked to the widely followed Barclays U.S. Aggregate Bond Index. The index measures the U.S. investment grade bond market, which includes investment grade U.S. Government bonds, investment grade corporate bonds, mortgage pass-through securities and asset-backed securities. With almost $10 billion in assets, AGG is the largest bond ETF and it carries a yield in the vicinity of 4.5%. Year-to-date, AGG has declined 2.09%*. In 2008, AGG gained 5.88% and the fund’s annual expense ratio is 0.24%.
iShares iBoxx $ High Yield Corporate Bond Fund (NYSEArca: HYG)
HYG is benchmarked to the iBoxx $ Liquid High Yield Index, which is designed to provide a balanced representation of the U.S. dollar-denominated high yield corporate bond market through some of the most liquid high yield corporate bonds available. The number of bond issues within HYG is typically 50, although this may change from time to time. The fund has close to $2.13 billion in assets and carries a juicy yield of 11.56%. Year-to-date, HYG has increased by 5.35%. In 2008, HYG fallen 23.86% and the fund’s annual expense ratio is 0.50%.
Stock exchange-traded funds have been lambasted for slicing the market too narrowly. But with bonds, more precision is what financial advisers need.
Investors turned to fixed-income holdings last year to offset plunging stock values. But while Treasurys held up, municipal and corporate bonds cratered alongside stocks.
This exposed a problem with many basic fixed-income mutual funds: These are often designed as catch-alls, holding all kinds of bonds and making it difficult for investors to gauge risk.
In fund researcher Morningstar Inc.’s “intermediate term” bond fund category, for instance, the 10 best performers had, on average, almost 40% of their holdings in Treasurys and returned about 8.6% in 2008. The 10 worst performers in same category, with only about 6% in Treasury holdings, were down about 30% on average.
ETF firms are aiming to capitalize on that kind of discrepancy, hoping financial advisers are ready to replace all-purpose bond funds they previously bought for clients with a mix of several narrow-focus bond ETFs, an approach that may allow them to calibrate risks more carefully.
“With iShares ETFs, there are no investment-style surprises,” says Christine Hudacko, a spokeswoman for Barclays PLC’s (BCS) recently sold iShares unit. “No one needs more surprises now.”
Investors seem to be responding to the ETF companies’ pitch, having poured about $23 billion into bond ETFs in 2008 and another $10.9 billion in the first quarter of 2009, according to a recent report by Morgan Stanley.