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When Bond ETFs Should Be Part of a Portfolio

When Bond ETFs Should Be Part of a Portfolio

March 14, 2019

While many think investing primarily involves the stock market, it's important to remember the bond market is significantly larger. The total value of U.S. stocks is about $20 trillion, while the bond market is more than $40 trillion.

Bonds essentially are loans, either to governments or corporations, and investors are repaid their money with interest over time. Anyone at or near retirement should understand the appeal of bonds as part of a fixed-income portfolio designed to deliver regular paychecks. Relying on income is one of the most powerful ways to protect your nest egg and help meet retirement needs.

Here are seven top exchange-traded funds with different income strategies to consider.

1. iShares iBoxx Investment Grade Corporate Bond ETF (ticker: LQD). With more than 1,000 high-quality bonds from top names including Goldman Sachs Group (GS) and Verizon Communications (VZ), the LQD ETF is a logical starting point for fixed-income investors – and with more than $32 billion in assets, it's a popular one, too.

Although the holdings are deep, the bias of this ETF is toward banking stocks, with roughly 27 percent of the portfolio in this sector. That's a hazard for many investment grade bond funds, since financials are among the most frequent users of the bond market to raise capital. That's something to be aware of if you want to watch your exposure to banks.

2. Fidelity Low Duration Bond Factor ETF (FLDR). With talk of interest rates rising, many investors are worried about the loss of principal value in their bond funds. Older bonds can become less valuable as new bonds offer better returns, so a fund moving out of long-term corporate bonds may take a hit if rates move steadily higher.

This Fidelity fund focuses on the most short-term investments. It features corporate and government bonds that mature in three years or less. At present, top holdings including bonds from the National Australia Bank (NABZY), domestic automaker Ford Motor Co. (F) and the U.S. Treasury. It yields a bit less, but is also less exposed to interest rate risk. – Jeff Reeves

The best bond ETFs to buy now.

Here are seven of the best bond exchange-traded funds for fixed-income investors to buy now:

iShares iBoxx Investment Grade Corporate Bond ETF (LQD)
Fidelity Low Duration Bond Factor ETF (FLDR)
iShares 1-3 Year Treasury Bond ETF (SHY)
SPDR Bloomberg Barclays High Yield Bond ETF (JNK)
Pimco 0-5 Year High Yield Corporate Bond ETF (HYS)
Vanguard Emerging Markets Government Bond ETF (VWOB)
iShares Core U.S. Aggregate Bond ETF (AGG)
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