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Many people have no stomach for the stock market, as they feel it is akin to gambling. The good news for people living on a fixed-income is that the anticipation of a sustained economic slowdown has brought the deflationary trade back into view, and the U.S. dollar does continue to appreciate against other currencies.

The flight to quality sent bond prices up and yields down. Interest rates on CDs and cash are excruciatingly low, while the Fed continues to keep rates down in order to stimulate the economy. There is a need for good yields and relative safety bond investments. Below are the 12 largest (by net assets) bond ETFs.

12 Main Bond ETFs (Sorted by Yield)

Fund Name (Ticker)

12-Month Yield

Beta

52wk Price Range

SPDR Barclays Capital High Yield Bond (NYSEARCA:JNK)

11.3%

-

21%

iShares iBoxx $ High Yield Corp Bd (NYSEARCA:HYG)

9.6%

0.71

20%

iShares iBoxx $ Inv Grade Corp Bond (NYSEARCA:LQD)

5.3%

0.23

12%

iShares Barclays Intermediate Credit Bd (NYSEARCA:CIU)

4.6%

0.12

8%

iShares Barclays 20+ Year Treas Bond (NYSEARCA:TLT)

3.9%

-0.06

15%

Vanguard Total Bond Market (NYSEARCA:BND)

3.8%

0.07

7%

iShares Barclays Aggregate Bond (NYSEARCA:AGG)

3.7%

0.07

8%

iShares Barclays 1-3 Year Credit Bond (NYSEARCA:CSJ)

3.3%

0.07

3%

iShares Barclays 7-10 Year Treasury (NYSEARCA:IEF)

3.2%

-0.05

7%

iShares Barclays TIPS Bond (NYSEARCA:TIP)

3.2%

0.13

8%

Vanguard Short-Term Bond ETF (NYSEARCA:BSV)

2.6%

0.02

4%

iShares Barclays 1-3 Year Treasury (NYSEARCA:SHY)

1.4%

-0.04

2%

iShares S&P 500 Index (NYSEARCA:IVV)

1.8%

1.00

40%

iShares DEX Universe Bond (XBB.TO)

4.4%

0.02

4%

As you can see, other than high yield bonds and corporate bonds ETFs, other ETFs in this list have very low betas. BND and AGG are 2 broad-market bond index ETFs and their 52-week price range are 7%. They are much less volatile than S&P500’s 40% price swing.

Canadian Bond ETF

Despite the fact that U.S. inflation seems to be dying right now, PIMCO's Mohamed El-Erian remains concerned about the future explosion of inflation. The three-decade rally in the bond market is likely drawing to a close and U.S. interest rates might rise for the next 2 decades, crimping bonds’ returns.

Besides piling into TIPS to fight inflation, you could also buy Canadian bond ETFs such as iShares DEX Universe Bond Index (XBB.TO), yielding 4.4% in Canadian dollar. With well-regulated banking and a commodity-based economy, Canada might be a relative safe place from inflation. XBB has a higher yield and a lower beta than the AGG or BND. Following chart shows XBB’s dividend history since December 2003, which was stable:

Retirement

An ideal portfolio should provide capital appreciation, income and growth. For retirees, the asset allocation depends on how your retirement nest egg compares to your personal expenses. Once you start winding down from a freewheeling lifestyle, medical expenses start to drift upward. You may have a catastrophic event and you might also want to leave some to your heirs. Nevertheless, it is still possible to have a comfortable retirement without investing in stocks.

Conclusion

Success in investing is about proper asset allocation: Divide your savings to strike the right balance between maximizing return and minimizing risk. Invest too conservatively, you may not get the income you need. On the other hand, you may get whacked if you are too aggressive. Even though bonds' best days may be behind them, investors might still need the volatility-reducing power of fixed-income ETFs to substitute portion of their CDs or annuity.

Investors need to realize that markets could fall dramatically. People usually overestimate their risk appetite. Take the risk you are comfortable with.

Disclosure: Long TIP and XBB.TO. Data is from iShares, Google and Yahoo Finance and is valid as of May 30, 2010.

Source: 3 Fixed Income ETFs for the Conservative Investor