3 Bond ETFs To Generate Income For Your Portfolio
Though investors have been continuously shifting their exposure to the equity world in the second half of the year thanks to a steadily improving U.S. economy, the fixed income world is also in great shape as a result of global market turmoil. The Eurozone is at a risk of facing deflationary woes after escaping recession almost a year ago. The economies of China and Japan have also dealt a blow to the global investing market and kept the risk quotient on even after the U.S. economy’s tantalizing Q2 growth of 4.6% and Q3 growth of 3.9%. All these issues have kept interest rates low this year despite the QE wrap-up in October. The yields on 10-Year U.S. Treasury note have fallen 25 bps to 2.24% (as of November 26, 2014) since the start of the year. Though short-term interest rates are likely to rise next year, long-term yields are subdued at the current level and are expected to remain so. An increased economic stimulus in Japan, the surprising rate cut in China and the potential announcement of the QE measure in the Eurozone with interest rates at rock-bottom levels will inject cheap money in the global economy and suppress long-to-medium-term interest rates. On the other hand, volatility levels might pick up in the days ahead as the S&P appears overvalued, having hit all-time highs more than 45 times this year and global growth remaining weak. Commodity markets continued their sluggish trend causing some to shift to low risk securities like bonds. This is especially true with the latest U.S. spending data coming in a little soft. The business spending plans indicator declined for two months in a row in October. Consumer spending nudged up just 0.2% in October despite multi-year low gasoline prices. Poor wages seemed to be the victim of such subdued numbers, per Reuters . With falling Treasury bond yields, relatively high-yield products look more attractive in the near term, at least to investors who are hungry for income. And should this broad market trend continue, moderately higher yield bonds and the related ETFs could put up a strong show and help investors to protect their portfolio as well as earn higher levels of income. Below we have analyzed three ETFs that investors could consider in this mixed kind of an environment where equities are witnessing a bull run. However, there is an associated risk of an imminent correction, or at least high levels of volatility. This urges investors to save a portion of their portfolios for fixed income. After all, even if markets end up in the red to close the year, a solid yield of about 4% should definitely help to withstand volatility. First Trust Tactical High Yield ETF (NASDAQ: HYLS ) The fund seeks to provide current income by investing primarily in a diversified portfolio of below investment-grade or unrated high-yield debt securities . Though capital appreciation is its secondary motive, it has added a bit this year, gaining 3.7% YTD.. The product thrives on long-short strategies. Net weighted average effective duration (considering the short positions) is 2.96 years indicating low interest rate risks. The fund is meant for an intermediate term as evident from 6.42 years of weighted average maturity. The product is expensive with an expense ratio of 1.28% per annum. Volume is light, trading in less than 35,000 shares per day that ensures extra cost for the product in the form of a wide bid/ask spread. The fund yields 4.93%. SPDR Barclays Long Term Corporate Bond ETF (NYSEARCA: LWC ) With an asset base of over $305 million and an average trading volume of roughly 100,000 shares, LWC is among one of the less popular funds in the corporate bond space. The fund tracks the Barclays Long U.S. Corporate Index to provide exposure to long-term corporate bonds. As such, the fund has a weighted average maturity of 23.89 years and an average duration of 13.85 years. The fund currently holds a well-diversified basket of 1,180 investment grade securities. Sector-wise, Industrials dominate the fund with a little over three-fourths of fund assets, followed by Finance and Utility with 19.6% and 13.04% allocations, respectively. The fund is a low-cost choice with 15 basis points as fees and has a 30-Day SEC yield of 4.26%. LWC is up 15% this year. PowerShares Fundamental Emerging Markets Local Debt Portfolio ETF (NYSEARCA: PFEM ) This emerging market fund seeks to provide exposure to high-yield bonds of various investment grades. Per the S&P, A and BBB-rated bonds take 30% of the portfolio each followed by AA rated bonds (21%) and BB rated bonds (13%). The fund presently holds 40 securities, targeting the intermediate part of the yield curve. The ETF has an average maturity of 7.18 years and an effective duration of 5.11 years. Country-wise, Brazil, Indonesia, Russia, Mexico and South Korea each occupy assets in the range of 7.5% to 9.7%. The fund charges 50 basis points as fees and has a 30-Day SEC Yield of 5.20%. The yield to worst came in at 5.74%. The fund manages a small asset base of $4.1 million and is relatively illiquid with average trading volume of roughly 1,000 shares a day.