Diversify Your Portfolio with Corporate Bonds ETFs
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If you are looking for a midway point between keeping cash idle in a bank account or putting it in rollercoaster equity, then you should look into the bond market. Investing in corporate bonds is an attractive way to balance out riskier all-equity portfolio. While corporate bond markets can provide you better returns than treasury bonds, it is also less risky than equity markets. Corporate bonds are issued by various companies and these companies may range from Fortune 500 to much smaller firms. The bonds are rated by various credit rating agencies such as Standard & Poor and Moody’s which assign grades to these bonds.
However, the biggest shortcoming of bonds is that for a retail investor, it is very difficult to make an informed decision. The corporate bonds market is more suitable for institutional investors as bond investment generally requires substantial investment base. However, this shortcoming can be easily overcome with the help of bond ETFs. These ETFs not only let the retail investors gain foothold in the bond market, but they also provide additional benefits like diversification and informed bond portfolio management. Just like any other investment vehicle, even corporate bond ETFs require you to carry out due diligence.
While choosing a good bond ETF, the first thing you might want to pay attention to is its returns. Do not get carried away by one-off returns, as many ETFs fail to replicate their performance year after year. Therefore, go with the ETFs with a consistent track record. Also, pay attention to expense ratio, as this will eat into your returns. Here is my list of top performing Bond ETFs:
iBoxx $ Investment Grade Corporate Bond Fund (NYSEMKT: LQD): The fund was started in 2002 and has an impressive track record. Its top holdings are in Wal-Mart Stores, Wells Fargo & Co. and Citigroup. With this fund, you can also gain international exposure as roughly one-fifth of the fund’s corpus is invested in international bonds while the remaining is in US bonds. As the name implies, the fund is targeted towards investment grade bonds as A grade and BBB grade bonds constitute 43.26 percent and 41.58 percent of this fund respectively. iBoxx $ Investment Grade Corporate Bond Fund generated 12.85 percent returns in the last one year while its 3 years return stands at 31.34 percent. Another positive for this fund is its relatively lower expense ratio at 0.15 percent.
Intermediate-Term Corporate Bond Index Fund (NASDAQ: VCIT): The fund provided 0.43 percent return in the past 4 weeks. It offered 12.25 percent and 31.37 percent return for one year and three years respectively. Intermediate-Term Corporate Bond Index Fund focuses on investment grade bonds and its main holdings come from financial, utility and industrial sector. The fund has negative beta at -0.22 and it offers dividend yield of 3.33 percent. Intermediate-Term Corporate Bond Index Fund is a relatively new fund as it was created in late 2009. It invests about 97 percent of its portfolio in bonds with maturity between 5 to 10 years.
SPDR Barclays Capital Long Term Corporate Bond ETF (NYSEMKT: LWC): The fund is designed to track Barclays Capital Long US Corporate Index and was established in 2009. SPDR Barclays Capital Long Term Corporate Bond ETF focuses on bonds with 10+ years of maturity and most of its holdings are concentrated in utility, financial and industrial sector. Its top 3 holdings are in Pacific Gas & Electric Co., AT&T and Verizon Global Fdg. SPDR Barclays Capital Long Term Corporate Bond ETF’s 76.49 percent corpus is invested in bonds with 20 to 30 years in maturity. It has given 11.91 percent return in last one year and its 3 years return is at 38.91 percent.
Barclays Credit Bond Fund (NYSEMKT: CFT): The fund focuses on bonds with a remaining maturity period of greater than one year. The fund invests about 35 percent of its corpus in bonds with maturity in 1 to 5 years range. It also invests in investment grade bonds and 41 percent of its holding has BBB credit rating. Barclays Credit Bond Fund has generated 10.22 percent return in last one year whereas its 5 years return is 38.41 percent. However, the fund has relatively high expense ratio at 0.20 percent. Its dividend yield is 3.46 percent.
Short-term Corporate Bond Index Fund (NASDAQ: VCSH): The fund couples a low expense ratio with good return. It is designed to track the Barclays Capital US 1-5 Year Corporate Index and invests in bonds with maturity between 1 to 5 years. More than 50 percent of its holdings is in A rated bonds. Barclays Credit Bond Fund gives 2.29 percent dividend yield and its one year return is at 6.01 percent. The fund was started in 2009 and has generated 13.81 percent return in past three years. Barclays Credit Bond Fund has its top holdings in JPMorgan Chase, Bk Amer Fdg and General Elec Cap Corp.
My list focuses on funds with good returns generated from investment in high quality corporate bonds. These funds also have lower than average expense ratio for their category and hence provide better bang for your buck.
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