The fear of rising interest rates as the FOMC continues to taper the monthly asset-purchasing program has kept a large number of investors away from bond ETFs. That has been the incorrect strategy as a high number of bond ETFs have been able to outperform the U.S. stock market. The SPDR S&P 500 ETF (NYSEARCA:SPY) is up 1.8 percent in 2014 and has been in a trading range for the last couple of months.
As interest rates on U.S. Treasuries have come down from a high set at the beginning of the year, the related bond ETFs have rallied. The iShares Barclays 20+ Year Treasury Bond ETF (NYSEARCA:TLT) is up 8.9 percent this year and recently hit a nine-month high. The current yield on TLT is 3.24 percent and the expense ratio is 0.15 percent. The ETF is composed of a basket of Treasuries with maturities greater than 20 years.
The SPDR Barclays Capital High Yield Bond ETF (NYSEARCA:JNK) is up 3.5 percent in 2014 with the monthly dividends included. The ETF is a basket of over 700 individual corporate bonds that are rated below investment grade, also known as junk bonds. The current yield on the ETF is 4.8 percent, more than twice that of the 10-year U.S. Treasury bond. The expense ratio is 0.40 percent.
Market Vectors High-Yield Municipal Bond ETF (NYSEARCA:HYD) has an impressive gain of 7.5 percent when including the monthly dividend. The portfolio is made up of 75 percent below investment-grade municipal bonds and 25 percent the lowest investment-grade municipal bonds. In essence, the ETF is composed of municipal bonds that are considered junk status. The 30-day SEC yield is 5.4 percent, however due to the tax advantages of municipal bonds, the tax equivalent rate for an investor in the highest federal tax bracket (39.6 percent) is an astounding 8.95 percent. The expense ratio is 0.35 percent.
Emerging Market Bonds
Investors looking for income from overseas can turn to the Vanguard Emerging Markets Government Bond ETF (NASDAQ:VWOB). The ETF is up 3.5 percent year-to-date and currently has a yield of 4.7 percent. The countries with the highest exposure in the portfolio include Russia, Brazil, and Mexico. The annual expense ratio is 0.35 percent.
Not only do the above ETFs offer diversity to an equity portfolio, they also provide income that is above that of the 10-year U.S. Treasury bond. Eventually interest rates will begin to increase and at that point, it could be time to consider paring back exposure to the fixed income sector.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.
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