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In this article, I am evaluating all/intermediate-term non-junk bond investments. I am evaluating using a methodology described in two previous articles entitled "Determining the Best Bond Funds: True Future Total Return" and "Future Inflation's Likely Impact on Bonds".

In my last article, I evaluated long-term non-junk bond investments. In it, I concluded that Market Vectors Long Municipal Index (NYSEARCA:MLN) appears to be the best choice for someone investing in a long-term bond ETF―unless you are from California or New York and higher in the state and/or local tax brackets. If you are from California or New York and higher in the state and/or local tax brackets, PowerShares Insured California Muni Bond (NYSEARCA:PWZ) or PowerShares Insured New York Muni Bond (NYSEARCA:PZT) may be better for you.

This analysis of all/intermediate-term bonds reaches a different conclusion for multiple reasons.

(1) In the all/intermediate-term realm, municipal bonds are not nearly as relatively underbought, in recent years, as they are in the long-term realm. The chart below covers ETF share price performances from 10/12/07 to 10/11/12. The line finishing highest is iShares Barclays 20+ Year Treasury Bond (NYSEARCA:TLT). The line finishing next highest is iShares Barclays 7-10 Year Treasury Bond (NYSEARCA:IEF). The line finishing next highest is Vanguard Long-Term Corporate Bond (NASDAQ:VCLT). The line finishing next highest is iShares iBoxx $ (All-Term) Investment-Grade Corporate Bond (NYSEARCA:LQD). The line finishing next highest is SPDR Nuveen Barclays Capital (All-Term National) Municipal Bond (NYSEARCA:TFI). The line finishing lowest is PowerShares Insured (Long-Term) National Municipal Bond (NYSEARCA:PZA).

(click to enlarge)OverUnderBought Chart - 121011

(2) In the intermediate-term realm, there are corporate bond ETFs that hold all of the bonds in their portfolio to maturity and, then, return the principal payments to you as cash. A vast majority of bond funds are, currently, bad or relatively poor longer-term investments because interest rates are low and rates figure to be higher in the future. Holding bonds until maturity eliminates the capital losses associated with rising interest rates.

(3) In the intermediate-term versus the long-term realm, it is more practical to purchase individual bonds. Purchasing a twenty or thirty years-to-maturity bond is something you may not want to do because you may not want to lock in a low interest rate for that long. I think, if you are going to lock up your money in a bond or CD investment, something like 3 to 5 years is a better choice than something like 7 to 10 years, even. In part, I believe this because interest rates should be largely more attractive in about 5 years. The best exact timeframe for locking up your money is debatable though. I will evaluate individual intermediate-term bonds, versus bond funds, in my next, versus this, article. This way the topic will receive sufficient attention.

(4) In the intermediate-term versus the long-term realm, CDs become a practical choice. Long-term CDs seem to be rare, and I have yet to see one with a relatively attractive interest rate. There are a lot of CDs in the 10-year or less maturity range.

Below are two spreadsheets. The data in the spreadsheets assumes a $100,000 investment, 25% federal income tax rate, 15% federal capital gains tax rate, and no applicable state or local taxes. The first spreadsheet provides Adjusted True Yields. The second spreadsheet provides True Future Total Returns. The potential investments covered by the spreadsheets are:

iShares S&P (All-Term) National AMT-Free Municipal Bond ETF (NYSEARCA:MUB)

SPDR Nuveen Barclays Capital (All-Term National) Municipal Bond ETF

Market Vectors Intermediate-Term Municipal Bond ETF (NYSEARCA:ITM)

Guggenheim BulletShares 2020 (Maturity) Corporate Bond ETF (NYSEARCA:BSCK): BSCK will transition to cash and cash equivalents in the last 6 months of its existence. It will terminate on or about 12/31/20, and provide its cash to shareholders.

Vanguard Intermediate-Term Corporate Bond ETF (NASDAQ:VCIT)

iShares iBoxx $ (All-Term) Investment-Grade Corporate Bond ETF

iShares Barclays 7-10 Year Treasury Bond ETF

A nationally-available non-callable 10-year Goldman Sachs Bank U.S.A. CD (CD1): With a 2.5% interest rate, this may not be the best nationally-available non-callable 10-year CD available; but it is the best one I could find without too much effort. I found this CD via my broker (i.e., Merrill Lynch).

A sample locally-available non-callable 7-year CD (CD2): This 2.8% interest rate CD is available from the San Antonio Federal Credit Union (SACU). I found it via DepositAccounts.com. The 2.8% interest rate is for an investment of $90,000 or more. Interest rates are slightly less for smaller investments. This is one of the best locally-available 7-year CDs I could find for Texas. (I live in Texas.) It is an example of the kind of CD deal you are eligible for if you work or worked for a certain entity, live, attend college, or worship in a certain locale, or are a close relative of such a person. Also, it is a good example of why you should not assume by the name of an institution that you are not eligible for its CDs. Some people in Houston are also eligible to join SACU and purchase its CDs.

A sample locally-available non-callable 10-year CD (CD3): This 3.3% interest rate CD is also available from SACU. The 3.3% interest rate is for an investment of $90,000 or more. Interest rates are slightly less for smaller investments. This is the best locally-available 10-year CD I could find for Texas.

Fund Yield Type (YTM, YTW, or OAY) Yield Shares Price Amount Personal Expenses Personal Expenses % Holding Period (Years) Annualized Personal Expenses % Fund Expense Ratio Annual Default Losses Last Distribution Distributions Per Year Interest Rate Interest Tax Rate Annual Interest Tax Loss Current Price vs. Par Value Differences Gain or Loss Non-Yield Capital Gain or Loss Annualized Non-Yield Capital Gain or Loss Annualized Non-Yield Capital Gain or Loss % Capital Gain or Loss Tax Rate Annual Capital Gain or Loss Tax Effect Annual Adjusted True Yield As of Date
MUB YTW 2.08% 895 $111.71 $100,000 $16.73 -0.02% 8.23 0.00% -0.25% -0.01% $0.27 12 2.90% 0.00% 0.00% -0.82% NA NA 0.00% 15% 0.12% 1.94% 10/9/12
TFI YTW 2.15% 4,073 $24.55 $100,000 $16.73 -0.02% 8.23 0.00% -0.30% -0.01% $0.06 12 2.72% 0.00% 0.00% -0.57% NA NA 0.00% 15% 0.09% 1.93% 10/9/12
ITM YTW 2.07% 4,214 $23.73 $100,000 $16.73 -0.02% 8.23 0.00% -0.24% -0.01% $0.05 12 2.49% 0.00% 0.00% -0.41% NA NA 0.00% 15% 0.06% 1.89% 10/9/12
BSCK YTW 2.80% 4,715 $21.21 $100,000 $16.73 -0.02% 8.23 0.00% -0.24% -0.22% $0.05 12 2.69% 25.00% -0.67% 0.11% NA NA 0.00% 15% -0.02% 1.65% 10/9/12
VCIT YTM 2.89% 1,135 $88.08 $100,000 $16.73 -0.02% 8.23 0.00% -0.14% -0.22% $0.24 12 3.23% 25.00% -0.81% -0.34% NA NA 0.00% 15% 0.05% 1.77% 10/9/12
LQD YTW 2.82% 820 $121.99 $100,000 $16.73 -0.02% 8.23 0.00% -0.15% -0.22% $0.38 12 3.78% 25.00% -0.94% -0.95% NA NA 0.00% 15% 0.14% 1.64% 10/9/12
IEF YTM 1.39% 928 $107.77 $100,000 $16.73 -0.02% 8.23 0.00% -0.15% 0.00% $0.14 12 1.57% 25.00% -0.39% -0.18% NA NA 0.00% 15% 0.03% 0.88% 10/9/12
CD1 NA 2.50% 100 $1,000.00 $100,000 $150.00 -0.15% 10 -0.02% 0.00% 0.00% $25.00 1 2.50% 25.00% -0.63% 0.00% NA NA 0.00% 15% 0.00% 1.86% 10/9/12
CD2 NA 2.80% 1 $100,000.00 $100,000 $0.00 0.00% 7 0.00% 0.00% 0.00% $2,800.00 1 2.80% 25.00% -0.70% 0.00% NA NA 0.00% 15% 0.00% 2.10% 10/9/12
CD3 NA 3.30% 1 $100,000.00 $100,000 $0.00 0.00% 10 0.00% 0.00% 0.00% $3,300.00 1 3.30% 25.00% -0.83% 0.00% NA NA 0.00% 15% 0.00% 2.48% 10/9/12
Fund Yield Type (YTM, YTW, or OAY) Yield Shares Price Amount Personal Expenses Personal Expenses % Holding Period (Years) Annualized Personal Expenses % Fund Expense Ratio Annual Default Losses Last Distribution Distributions Per Year Interest Rate Interest Tax Rate Annual Interest Tax Loss Current Price vs. Par Value Differences Gain or Loss Non-Yield Capital Gain or Loss Annualized Non-Yield Capital Gain or Loss Annualized Non-Yield Capital Gain or Loss % Capital Gain or Loss Tax Rate Annual Capital Gain or Loss Tax Effect Annual True Future Total Return As of Date
MUB YTW 2.08% 895 $111.71 $100,000 $16.73 -0.02% 8.23 0.00% -0.25% -0.01% $0.27 12 2.90% 0.00% 0.00% -0.82% NA NA -1.52% 15% 0.35% 0.65% 10/9/12
TFI YTW 2.15% 4,073 $24.55 $100,000 $16.73 -0.02% 8.23 0.00% -0.30% -0.01% $0.06 12 2.72% 0.00% 0.00% -0.57% NA NA -1.52% 15% 0.31% 0.64% 10/9/12
ITM YTW 2.07% 4,214 $23.73 $100,000 $16.73 -0.02% 8.23 0.00% -0.24% -0.01% $0.05 12 2.49% 0.00% 0.00% -0.41% NA NA -1.87% 15% 0.34% 0.30% 10/9/12
BSCK YTW 2.80% 4,715 $21.21 $100,000 $16.73 -0.02% 8.23 0.00% -0.24% -0.22% $0.05 12 2.69% 25.00% -0.67% 0.11% NA NA 0.00% 15% -0.02% 1.65% 10/9/12
VCIT YTM 2.89% 1,135 $88.08 $100,000 $16.73 -0.02% 8.23 0.00% -0.14% -0.22% $0.24 12 3.23% 25.00% -0.81% -0.34% NA NA -2.26% 15% 0.39% -0.15% 10/9/12
LQD YTW 2.82% 820 $121.99 $100,000 $16.73 -0.02% 8.23 0.00% -0.15% -0.22% $0.38 12 3.78% 25.00% -0.94% -0.95% NA NA -2.01% 15% 0.44% -0.07% 10/9/12
IEF YTM 1.39% 928 $107.77 $100,000 $16.73 -0.02% 8.23 0.00% -0.15% 0.00% $0.14 12 1.57% 25.00% -0.39% -0.18% NA NA -3.80% 15% 0.60% -2.35% 10/9/12
CD1 NA 2.50% 100 $1,000.00 $100,000 $150.00 -0.15% 10 -0.02% 0.00% 0.00% $25.00 1 2.50% 25.00% -0.63% 0.00% NA NA 0.00% 15% 0.00% 1.86% 10/9/12
CD2 NA 2.80% 1 $100,000.00 $100,000 $0.00 0.00% 7 0.00% 0.00% 0.00% $2,800.00 1 2.80% 25.00% -0.70% 0.00% NA NA 0.00% 15% 0.00% 2.10% 10/9/12
CD3 NA 3.30% 1 $100,000.00 $100,000 $0.00 0.00% 10 0.00% 0.00% 0.00% $3,300.00 1 3.30% 25.00% -0.83% 0.00% NA NA 0.00% 15% 0.00% 2.48% 10/9/12

Notes:

(1) Yield to worst (YTW) or yield to maturity (YTM) numbers were not available for 10/9/12 for some ETFs. I made minor adjustments to some of the YTWs and YTMs to turn them into estimated 10/9/12 equivalents.

(2) The MUB and IEF YTWs were calculated based on the YTWs for the funds' individual bond holdings.

(3) 0.07% of TFI's expense ratio is waived until 10/31/12. I used an expense ratio which assumes this waiver will not be extended.

(4) TFI appeared slightly leveraged. Its bond holdings were 102.31% of NAV. I made adjustments to TFI's YTW to estimate TFI's YTW as a non-leveraged fund, as other funds covered in these spreadsheets were not leveraged. TFI's Last Distribution was also adjusted to eliminate the affect of leverage.

(5) ITM appeared slightly leveraged. Its bond holdings were 100.49% of NAV. I made adjustments to ITM's YTW to estimate ITM's YTW as a non-leveraged fund, as other funds covered in these spreadsheets were not leveraged. ITM's Last Distribution was also adjusted to eliminate the affect of leverage.

(6) The difference between the Annualized Non-Yield Capital Gain or Loss Percentages for MUB and TFI was insignificant, so I averaged the percentages for MUB and TFI and used this average for MUB and TFI.

(7) BSCK Default Losses and Last Distribution were adjusted to account for the fund converting to cash and cash equivalents in its last 6 months of existence.

(8) There was no YTW available for VCIT, but it is plausible that VCIT holds no or almost no bonds that have a YTW different than their YTM because LQD holds almost no bonds that have a YTW different than their YTM.

(9) The $150 Personal Expenses for CD1 is an approximation of the cost of purchase. The CD was not available for purchase yet when I spoke with Merrill Lynch. The Merrill Lynch representative mentioned that the CD may sell at a slight discount, thereby negating some of the purchase cost.

(10) Annual Default Losses: Do not depend on the figures I place in this column to be correct. These are guesstimate figures I developed months ago. Actual default losses may be more or less. In fact, they may be much higher than I indicated here. Also, in a given year, default losses can be much greater or less than they were in preceding years. It is true, though, that, historically, default losses on municipal bonds have been very small; and shorter-term Treasuries are extremely unlikely to default.

Results

In summary, the results were as follows:

ETF or CD

Adjusted True Yield

True Future Total Return

MUB

1.94%

0.65%

TFI

1.93%

0.65%

ITM

1.89%

0.30%

BSCK (8.23 years to maturity)

1.65%

1.65%

VCIT

1.77%

-0.15%

LQD

1.64%

-0.07%

IEF

0.88%

-2.35%

CD1 (10-year national)

1.86%

1.86%

CD2 (7-year local)

2.10%

2.10%

CD3 (10-year local)

2.48%

2.48%

The above results are for the 25% U.S. federal income tax bracket. From an Adjusted True Yield perspective, what the best investment is can depend on what tax bracket you are in. For tax brackets 0%, 10%, and 15%, the corporate bond ETFs are better than the municipal bond ETFs. For tax brackets 25%, 28%, 33% and 35%, the municipal bond ETFs are better than the corporate bond ETFs. The only tax bracket in which every CD is not better than every corporate bond ETF is 0%, wherein VCIT barely beats CD1 (i.e., the 10-year Goldman Sachs CD). It is always true that, if you are eligible for a good enough CD deal, the CD is the best investment. Treasuries are always the worst investment.

Adjusted True Yield is a good statistic for enhancing your understanding; however, you should base your decisions on True Future Total Return because, additionally, it accounts for estimated future non-yield capital gain or loss. From a True Future Total Return perspective, if you are eligible for a good enough CD deal, the CD is the best investment. If you cannot get a special CD deal, BSCK or a CD is the best investment. This is because the CDs and BSCK can be held to maturity, thereby preventing capital losses when interest rates rise, as they likely will in the intermediate-term.

BSCK matures at the end of 2020. Guggenheim has like ETFs that mature in 2019, 2018, 2017, etc. BSCK is the most impressive looking of the bunch because, among other reasons, its longer time to maturity lessens the impact of the fund converting to cash and cash equivalents over the last six months of its existence.

Source: The Best All/Intermediate-Term Non-Junk Bond Investments

Additional disclosure: I manage a portfolio with positions in mutual funds with holdings similar to MLN, PZA, and ITM and positions in LQD and CDs.