Vanguard Total Bond Market ETF Leads US Total Bond ETFs

Retirement concerns are important to us all. A well thought out, long term approach to investing is a key for retirement planning.  This makes bonds attractive. The lower risk inherent in bonds make them a key part most portfolios. Today we look at total bonds

What are corporate Bonds? Companies need money for expansion, acquisition in new units, or exploring new markets. One way of raising these funds is through a bond issue. Bonds are corporate debt, and the attractiveness of them is determined by the organization’s credit history. The key question arises over how the bond rates are determined.

Bonds rates are measured with respect to their position above treasury yield. This is to induce the investor to purchase their bonds assuming that if the rate is below the treasury yield no one will be interested as treasury is the secure of all bonds. Currently treasury yields are low making overall bonds look attractive. But there are secondary factors.

It has has been more than 31 months during which the FED has kept interest rates low. With inflations showing signs of returning with the record high price of oil and commodities we expect that inflation will keep rising. In the last six months the producer price index (PPI) has risen at an annual rate of 10%. That will feed into the consumer price index (CPI) over the next few months.

This is a serious concern for bond buyers and one reason they remain under pressure.

Please find below the table of major ETF’s.

Description Symbol 1 Yr 3 Yr 5 Yr Avg. Volume(K) 1 Yr Sharpe
Vanguard Total Bond Market ETF (BND) 5.32% 4.73% NA 728 182.95%
iShares Barclays Aggregate Bon (AGG) 5.35% 5.74% 6.24% 655 181.9%
PowerShares CEF Income Composi (PCEF) 11.37% NA NA 55 179.66%
Vanguard Intermediate-Term Bon (BIV) 7.47% 7.1% NA 113 144.51%

From the above table we have a mixed picture of returns since the bonds are used as a fixed income returns usually. BND is the best as it has a significant history of 5 years as all the others are the new one in the markets. AGG has also good volumes making it attractive for investment.  BND is also good in terms of return and heavy volume the overall return in 5.18% which I well above the treasury benchmark yield of 10 years. The expense ratio is 0.12%.

Please find bellows Distribution by credit quality as at 13-05-2011.

US Treasury 69.7% 38.35%
Aaa 5.2% 36.86%
Aa 4.9% 2.99%
A 10.6% 11.21%
Baa 9.6% 10.59%
Total 100% 100%

From this we see AGG has better diversification in terms of credit quality rating compared to BND. There is a slight change from our previous article in which Baa grading has lesser concentration the revised BAA concentration is increased by the fund. Usually the lower the credit rating the higher the yield can be obtained from these bonds.

Total Bonds are very important from the portfolio perspective. There appropriate use can provide stability and a hedge when equities drop. The proper allocation of bonds in the portfolio not only provides the hedge in terms of volatility but also a good fixed income streams.

Written By The Staff Of

Disclaimer: MyPlanIQ does not have any business relationship with the company or companies mentioned in this article. It does not set up their retirement plans. The performance data of portfolios mentioned above are obtained through historical simulation and are hypothetical.

LTI Systems, Inc. is the operator of and The founders of LTI Systems have extensive technology and business background in computer and semiconductor industries. They have been using the strategies provided by MyPlanIQ for their own personal retirement and taxable investments. The mission of LTI Systems is to make wealth management investment strategies that are used to be only accessible to institutions and high net worth individuals available to private investors with a fraction of flat cost and ease of use. The founders of LTI Systems, investors themselves, take pride in creating such a system and service for investors by taking the perspective from the investor side. They are using the system and the strategies for their own investment and align their interests with their customers.  

MyPlanIQ’s blog provides periodical articles to discuss issues related to retirement plans (401(k), 403(b) and IRAs), deferred compensation plans (457), college savings plans (529), taxable brokerage investment accounts, variable annuities and universal life insurance plans. It also covers investment strategies, specifically strategic and tactical asset allocation and investment products such as ETFs and mutual funds. In addition, it syndicates daily articles that are related to retirement planning, personal finance, investment strategies, annuities, insurance, college savings and market/economic outlooks. It provides a comment and discussion community for readers.

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