Searching for Yield

By Ron DeLegge, Editor - February 1, 2008

SAN DIEGO (ETFguide.com) - With the Federal Reserve bent on reducing short term interest rates and bond yields falling, where do bond investors go?
 

One idea is to stick with shorter duration bond exchange-traded funds (ETFs), which tend to be less impacted by decreasing rates.

The Vanguard Short Term Bond ETF (Ticker: BSV) follows the Lehman 1-5 Government/Credit Index. The index includes all medium and larger issues of U.S. government, investment-grade corporate, and investment-grade international dollar-denominated bonds that have maturities between 1 and 5 years and are publicly issued. BSV has a current yield of 3.30 percent.

Other short term bond ETFs include the iShares Lehman 1-3 Year Credit Bond Fund (Ticker: CSJ) and the iShares Lehman 1-3 Year Treasury Bond Fund (Ticker: SHY). CSJ has a distribution yield of 4.06 percent and SHY is at 3.96 percent.

For investors that want a super short term bond index fund that only holds government bonds, the SPDR Lehman 1-3 Month T-Bill ETF (Ticker: BIL) fits the bill. This ETF follows the Lehman Brothers 1-3 Month U.S. Treasury Bill Index and contains U.S. Treasuries that have a remaining maturity of greater than or equal to 1 month and less than 3 months. It also includes all publicly issued zero-coupon U.S. Treasury Bills that have similar maturities and are rated investment grade.

Another choice is intermediate-term bond funds which have average durations that are greater than 3.5 years and less than six years. ETFs that follow this area are the iShares Intermediate Lehman Government/Credit Bond Fund (Ticker: GVI) and the Vanguard Intermediate Term Bond ETF (Ticker: BIV). GVI has a 12-month annualized yield of 3.85 percent and BIV is at 4.41 percent.

One last area to check out is the Lehman Aggregate Bond Index (“the Agg”). It’s a popular benchmark for bond fund managers and a broad cross section of the fixed income market. The Agg provides exposure to U.S. investment grade bonds, including U.S. Treasuries, corporate bonds, and mortgage and asset backed securities. The average bond holding in the Lehman Agg has a duration of 6.2 years.

ETFs that follow the Agg are the iShares Lehman Aggregate Bond Fund (Ticker: AGG), the SPDR Lehman Aggregate Bond ETF (Ticker: LAG) and the Vanguard Total Bond Market ETF (Ticker: BND). Since all of these ETFs follow the same index, the difference in performance is in the manager’s ability to sample the index effectively and the fund’s expenses. At 0.11 percent, BND has the lowest fee, LAG is 0.13 percent, and AGG is 0.24 percent.

Current yields for ETFs tracking the Agg range from 4.50 to 4.71 percent.

It's important that bond investors keep their fund expenses low and fixed income ETFs can keep help them to achieve this objective. Remember: Every basis point of cost reduces your income and total return.