Here at StreetAuthority, we talk alot about the appeal of
rising dividends, but it's unwise to pursue high yields solely
throughstocks . Themarket can gyrate wildly, and a bad quarter
for any givenstock can wipe out ayear 's worth ofdividend
As I noted in a recent look at Federal Reserve
policy,fixed-income investors must continue to look beyond the
traditional offerings from the U.S. government (bonds , bills,
etc.) and banks (CDs ) and seek out otherinvestments thatoffer up
more solidincome payments.
That's why you need to keep tracking opportunities among bonds
as well. Where some investors seek out the safety (and
comparatively low yields) of investment-gradecorporate bonds ,
and others prefer riskier but higher-yielding junk bonds, there
is a middle ground.
Fixed-income exchange-tradedfunds (
) offer decent yields and are comparatively safe because they own
a basket of bonds, making them less vulnerable to a default by
any one particularissue .
Another benefit of ETFs: There are now so many of them that
you can choose from a wide range of options when building out
Here are three fixed-income ETFs that hold great long-term
1. PowerShares SeniorLoan PortfolioETF (
These days, even junk bonds (also known ashigh-yield bonds ) have
become quite popular with risk-averse investors. As a result,
their rising prices have pushedjunk bond yields down into the 5%
to 6% range. Yet these bonds carry considerable risk. If any
particularbond issuer defaults, only 44% of the assets end up
being recovered, according to Morningstar.
That makes this ETF comparatively more appealing: Because it
holds seniorsecured debt of these high-yielders, itwill suffer
less if there are defaults. Roughly 65% of assets secured by
seniordebt are recovered inbankruptcy proceedings.
And investors can still get solid yields. This ETF distributed
$1.20 a share in 2012 and is on pace to maintain that payout this
year, equating to a 4.8%yield .
An added benefit: The bonds in this portfolio are "floating
rate," which means their payouts would rise in tandem with
eventually rising interest rates. That means the value of the
bonds will also remain constant as rates rise, unlike many bonds
that lose value as rates move higher.
2. Vanguard Long-Term Corp BondIndex ETF (Nasdaq:
If you are an active ETF investor, then you should always see
what Vanguard has to offer. Vanguard focuses on lowtransaction
costs , so the expense ratios among the ETFs are often the lowest
in the segment. Just as important, Vanguard's risk-averse
corporate culture means that the holdings in any portfolio have
been vetted to ensure they aren't too risky.
And that sums up the appeal of this ETF. It has anexpense
ratio of just 0.12% and typically pays out roughly $4 a share in
dividends every year, good for a 4.5% yield. The striking aspect
of that yield is that thisfund focuses on investment-grade bonds
(rated BBB or higher) issued by companies such as
General Electric (
. Many investment-grade bonds issued in recentquarters carry
interest rates closer to 3%.
3.SPDR BarclaysCapital Emerging Markets Local Bond ETF (
When investors think about emerging markets, they think about
volatile economies that can create havoc for leading regional
companies. Yet there's no reason to take on corporate risk in
these markets whengovernment bonds , which are far less likely to
default, already offer solid yields.
This ETF is loaded with government bonds from Mexico, South
Korea, Brazil, Poland and elsewhere. The average bond sports a
4.5% yield. Compare that with U.S. government bonds, which
typically yield less than 2%.
Note that this ETF owns these bonds in the localcurrency , so
an upward move in the U.S dollar would eat intogains (conversely,
a drop in the dollar would aid this fund's returns). Still,
thecurrency risk is something you should always look into when
seeking international exposure.
Risks to Consider:
Bonds aren't risk-free, just much less risky than stocks. But
they can fall in value in an era of slowing economic growth or
rising interest rates.
Action to Take -->
These funds don't offer the best yields around. Instead, they
offer respectable yields while taking on less risk than junk
bonds. Each of these three ETFs offers a different approach to
this niche, and they can be owned as a group.