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In the current investment environment, no asset class can be considered risk free. Even governments can default, either directly or by giving returns in a depreciated currency. Therefore, the medium- to long-term portfolio needs to be adjusted accordingly.
In my personal opinion, U.S. Treasury bonds might be a good trading option (from time to time) with a short- to medium-term perspective. However, remaining invested in long-term Treasury bonds might be suicidal for the portfolio.
Keeping this perspective in mind, I screened some ETFs, which invest primarily in investment grade corporate. In my opinion, considering exposure to these ETFs is a relatively better option for the long term than Treasury bonds (primarily 10 and 30-year Treasury bonds).
It has also been evident in many cases in the current crisis that the private sector has acted more rationally than the government sector. From this perspective as well, risk associated with investing in Treasury bonds or investment grade bonds might be considered to be at par.
Discussed below are two ETFs, which, in my opinion, have the potential to outperform the long-term Treasury bond returns. The first ETF has minimal exposure to government bonds, while the second ETF is more a blend of government bonds and investment grade corporate bonds.
Vanguard Long-Term Corporate Bond ETF (NASDAQ:VCLT)
The objective of the fund is to invest primarily in investment grade corporate bonds. The ETF maintains a dollar-weighted average maturity of 10-25 years. The ETF has exposure to 537 bonds with average maturity of 24.5 years as of August 2011.
The portfolio composition and distribution by issuer of the fund as of end August 2011 was:
Therefore, 99% of the fund exposure is concentrated to high quality corporate bonds.
Further Positives:
  1. A low expense ratio of 0.15% as of August 2011
  2. An attractive SEC yield of 5.19% currently
With these positives, the fund is an attractive long-term buy for the portfolio.
Vanguard Intermediate-Term Bond ETF (NYSEARCA:BIV)
This ETF Seeks to track the investment return of the Barclays Capital U.S. 5–10 Year Government/Credit Float Adjusted Index (a market-weighted bond index that covers investment-grade bonds with a dollar-weighted average maturity of 5 to 10 years). The investment is in high quality corporate bonds coupled with government bonds.
Therefore, this fund is ideal for investors looking for some exposure to government bonds along with investment grade corporate bonds. Further, being an intermediate-term bond ETF, the average maturity for this ETF is 7.3 years compared with 24.5 years for the long-term ETF.
The portfolio composition and distribution by issuer of the fund as of end August 2011 was:
As evident from the chart above, the ETF has a fine balance of investments in government bonds and corporate bonds. To add to the positives, the fund also has a low expense ratio of 0.11% and an attractive SEC yield of 2.35% for an intermediate-term bond ETF.
In conclusion, investment in Treasury bonds is surely not a disaster in the near term. However, there are other attractive options available (especially when nothing is risk free).
Source: Attractive Corporate Bond ETFs As A Government Bonds Substitute