Income ETFs To Watch If Rates Stay Low

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January 21, 2015 5:24pm NYSE:ANGL NYSE:CLY

etfs2014 was a pretty good year for U.S. bonds thanks to a host of global concerns which kept U.S. treasury yields low and as a result boosted bond prices with the long dated ones being a prime beneficiary of this trend.

Despite the steadily improving  U.S. economy last year, geopolitical uncertainty, global slowdown, deflationary fears in Europe, slumping growth in China, recessionary fears in Japan and sliding crude oil prices kept interest rates low.  This came in spite of the Fed wrapping up its bond buying program in October 2014.

In fact, the 10-year U.S. Treasury bond yield had fallen to roughly 2.50% a month ago from around 3% seen at the beginning of last year.  The rates have fallen further this year and are around 1.8% — the lowest level since May 2013. Moreover, the 30-year bond yields have recently tumbled to record lows.

A surprise drop in U.S. retail sales for the month of December, the relentless slide in crude oil prices, uncertain global growth outlook, deflationary fear and a fall in commodity prices led investors to shun risky assets. Demand on the other hand rose for safe haven assets, driving treasury yields lower since the start of the year.

Moreover, the surprise move by the Swiss National Bank to abandon its currency cap against the euro has added to market jitters. Also, the World Bank has cut its 2015 global growth forecast to 3% from 3.4% because of sluggishness in the Euro zone, Japan and some major emerging economies.

An uncertain economic outlook and deflationary fears have raised expectations that the Federal Reserve might delay its first interest rate hike to the second half of the year as against the current market expectation of a hike in June. Some are even of the view that the hike might be delayed until 2016 if the U.S. growth momentum weakens.

Even at record low 30-year Treasury yields, income seeking global investors are flocking to U.S. bonds, given the negative returns on the sovereign debt of nations including Germany. This is especially true as most developed and emerging markets including Europe, Japan and China are restoring to rate cuts to fight deflation and growth worries.

Below, we have highlighted three income ETF choices which have been yielding 3% or more, have seen decent year-to-date gains, and are benefiting from tumbling rates across the board. Any of these could be interesting choices for yield hungry investors who believe that rates are expected to stay low in the near term.

SPDR Barclays Capital Long Term Corporate Bond ETF (NYSEARCA:LWC)

With an asset base of $346.3 million and an average daily trading volume of 100,000 shares, LWC is among one of the less popular funds in the corporate bond space.

The fund tracks the Barclays Long U.S. Corporate Index to provide exposure to long-term corporate bonds. As such, the fund has a weighted average maturity of 23.62 years and an average duration of 13.93 years.

LWC currently holds a well-diversified basket of 1,227 investment grade securities. Sector-wise, Industrials dominates the ETF with two-thirds of fund assets, followed by Finance and Utility with 18.9% and 13.06% allocations, respectively.

The fund is a low-cost choice with 15 basis points as fees and has a 30-Day SEC yield of 4.07%. LWC is up 2.6% in the year-to-date frame and has returned 16.5% in the past one year.

iShares 10+ Year Credit Bond ETF (NYSEARCA:CLY)

The fund holds a basket of 1,186 investment grade bonds having a 30-Day SEC yield of 4.07%. CLY tracks the Barclays U.S. Long Credit Index composed of long-term, investment-grade U.S. corporate bonds and U.S. dollar-denominated bonds, including those of non-U.S. corporations and governments, with remaining maturities greater than 10 years.

The fund does a good job by spreading out its asset well among various sectors. Communications tops the list with 13.25% allocation, followed by 10.8% to Consumer Non-Cyclical and 9.8% to Electric.

CLY has a weighted average maturity of 23.20 years and an effective duration of 13.11 years. The fund charges 20 basis points as fees and has returned 2% this year and 15.5% in the past one year.

Market Vectors Fallen Angel ETF (NYSEARCA:ANGL)

This innovative fund uses a sampling strategy to track the performance of the BofA Merrill Lynch US Fallen Angel High Yield Index focusing on ‘fallen angel’ bonds. Fallen angel bonds are high yield securities that were once investment grade but have fallen from that level and are now trading as junk bonds.

This 150-security portfolio is widely spread out across its holdings with Financials (30.5%) as the top sector followed by Communications (20.3%) and Basic Materials (17.1%). The fund has a modified duration of 5.33 years and thus has moderate interest rate risk.

Additionally, the product mainly comprises BB and B rated corporates, which together make up more than 85% of the asset base. The product has about 65% tilt in the U.S., followed by Europe. The fund is well-diversified across its individual holdings.

The ETF trades in paltry volumes and charges a relatively low fee of 40 bps per year from investors. It has accumulated just $21.5 million in AUM and added 3.65% so far this year. It yields 5.52% per annum, while it has a 30-day SEC yield of 4.27%.

This article is brought to you courtesy of Zacks.

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