Three Bond ETFs To Weather The Storm

by on August 23, 2011 | ETFs Mentioned:

The downgrade handed down from Standard and Poor’s on U.S. debts was detrimental to American stocks for a short period, as major indexes saw plunges of 5% or more upon the release of the news.  With investors flocking to pull their assets from equities, gold has seen yet another historic landmark as it broke through the $1,900 per ounce mark in intraday trading. But another asset class will be in heavy focus over the next couple months; fixed income. With the U.S. downgraded and investors worried about how we will manage our current debt, bond ETFs will be in the limelight for a foreseeable future, as Washington fights over how to move forward and find any sort of compromise [see also ETF Insider: Panic Sparks Gold Rally].

While stocks have been swaying back and forth, two-year treasury yields hit their all-time low on concerns over the future of our economy. With our debts downgraded, and no stable plan for the future, short term U.S. debt may be the last place that many investors want to be, as it is one of the lowest yielding securities on the market today. But abandoning fixed income in portfolio altogether may not be a good idea either, as bonds are crucial for diversity and can provide constant yield that an investor needs. The problem now is finding the right bond product to wait out these tough days. In light of this, we highlight three bond ETFs below that could offer investors excellent diversification or yield far surpassing those found in the Treasury market. While these products aren’t for everyone, and may not warrant a significant allocation, their advantages should make many investors consider the benefits of more variety in the bond sections of their portfolios.

Market Vectors Emerging Markets Local Currency Bond ETF (EMLC)

EMLC tracks an index which is designed to follow a basket of bonds issued in local currencies by emerging market governments. While this fund now has a few competitors, it was the first of its kind when it debuted roughly a year ago, and has turned in a performance of approximately 6.4% since its inception. While the fund may not have the most in AUM with approximately $515 million under management,  it does feature high levels of liquidity, trading an average of almost 175,000 times a day. The fund offers exposure to a slew of debts from countries like Brazil, Chile, and Malaysia which effectively grants exposure to currencies like the real, peso, and the ringgit among many others [see also One Year Later: EMLC Comes Through For Yield Hungry Investors].

EMLC may be a good safe haven for the time being, as it tracks debts in non-U.S. dollar terms, effectively avoiding U.S. exposure altogether. While the U.S. markets will inevitably trickle down to almost every country around the world, these emerging markets will likely have fewer ties to the U.S. than other, more developed, nations. Aside from nixing U.S. influence, the fund is currently paying a nice 30-Day SEC Yield of 6.1%, adding a stable income to your portfolio.

Peritus High Yield ETF (HYLD)

HYLD is a combination of AdvisorShares and the Peritus management team, making for a unique active bond ETF. Right off the bat, investors will notice the rather high fees this product charges; 135 basis points, one of the more expensive ETFs in the space. But HYLD offers a number of advantages that other products cannot match, which may make the fees worth it for certain investors and especially those that prize flexibility above all else.

The active management characteristic, while off-putting to some, may be extremely useful in this environment as the managers can quickly jump out of failing positions and move to cash (which the fund did during our several dismal trading sessions last week). Though this product will invest in U.S. debts, its actively-managed trait may create value for investors who buy into the management team’s strategy. And best of all, HYLD is currently paying out a robust 30-Day SEC Yield of 8.2% [not sure what SEC yield is? see Bond ETFs In Focus: Defining All The Yield Metrics].

15+ Year U.S. TIPS Index Fund (LTPZ)

LTPZ tracks an unmanaged index comprised of U.S. Treasury Inflation Protected Securities with at least $1 billion in outstanding face value and a remaining term to final maturity greater than or equal to 15 years. In fact, 25% of this ETFs debts do not mature until the 20-30 year range, suggesting that the fund has a heavy focus on long term securities. The fund is offered by PIMCO, one of the biggest players in the fixed income industry, while charging minimal fees of just 20 basis points. As far as performance is concerned, this ETF is up almost 16% on the year, and has gained nearly 7% over the past two weeks, while almost everything else was soaked in red [see also Best ETF Performers Of 2010: Winners For Every ETFdb Category].

Though this tracks solely U.S. debts, its long-term focus should avoid the short-term risks that our nation is currently undergoing. And while long term debts are typically very interest-rate sensitive, the Fed’s decision to hold rates for two years will likely mean a nice steady yield from this ETF, which is currently paying out 3.3%. Furthermore, if investors see inflation start to pick up in the near future thanks to these Fed policies, those that bought LTPZ will likely be protected better than many of their non-TIPS buying peers.

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Disclosure: Photo courtesy of John Kerstholt. No positions at time of writing.