Top Bond ETFs

8/19/2013


Bond exchange-traded funds (ETFs) have some strong selling points, including rock-bottom expenses. But the funds are not perfect; traditional mutual funds sometimes are a better choice. If you plan to invest in bond ETFs, keep these points in mind:

Selection is limited. We count 189 bond ETFs, versus more than 6,200 bond mutual funds. Most bond ETFs don't provide much history to analyze; only 90 have three-year track records, making it difficult to gauge interest-rate risk and credit risk. In contrast, more than 4,100 bond mutual funds boast 10-year track records.

For better or worse, most bond ETFs mimic a broad index. ETFs typically hold a wider variety of bonds, maturities, and sectors than actively managed funds. But diversification may come at a price, as passively managed ETFs can't avoid weak market segments. For example, Vanguard Total Bond Market ($81; BND) has underperformed since 2009 partly because of its exposure to low-yielding Treasurys and volatile long-term government bonds — two segments often avoided by actively managed funds.

The price of a bond ETF may diverge from its underlying value. Forces of supply and demand, operational costs, and market volatility can cause a fund to trade at a discount or premium to its net asset value (NAV). Certain ETFs, particularly those that focus on less liquid markets like international or high-yield bonds, tend to have larger spreads. For example, the iShares Global ex USD High Yield Corporate ($55; HYXU) ETF recently traded at $54.94 with an NAV of $54.33 — a 1% premium.

Of the 189 bond ETFs, 99 traded at a premium to their NAV on Aug. 9. However, the average fund traded at a 0.14% discount to its NAV. Investors can control the price at which they buy and sell by using limit orders. Still, the fact that mutual-fund prices always match the NAV calculated at the end of the trading day is an advantage of traditional funds.

Conclusion

If bond ETFs make sense for your portfolio, make sure you know what you're buying. Investors seeking standout picks should consider the 10 funds listed below. PIMCO Total Return ($105; BOND), actively managed by high-profile investor Bill Gross, is a member of our Conservative Portfolio. The fund has delivered a negative return of 2.3% so far in 2013, hurt by its large exposure to Treasurys.

10 STANDOUT BOND ETFs
--- Total Return ---
ETF (Price; Ticker)
Year- To-
Date
(%)
3-Year
Annual.
(%)
Expense
Ratio
(%)
Category
iShares Barclays TIPS ($112; TIP)
(7.0)
4.3
0.20
Inflation Protected
Market Vectors Interm. Muni ($22; ITM)
(6.0)
2.6
0.24
Tax Free
PIMCO Total Return ($105; BOND)
(2.3)
NA
0.55
Actively Managed
PowerShares Emerging Mkts. ($27; PCY)
(11.3)
4.6
0.50
Emerging Markets
SPDR Barclays High Yield ($40; JNK)
1.2
9.2
0.40
Junk Bonds
SPDR Barclays Int'l Corp. ($35; IBND)
(0.3)
5.4
0.55
World
Vanguard Interm. Corp ($83; VCIT)
(3.5)
5.0
0.12
Intermediate Corp.
Vanguard Interm. Govt. ($63; VGIT)
(2.5)
2.5
0.12
Intermediate Govt.
Vanguard S-T Corp. ($80; VCSH)
0.0
3.1
0.12
Short-Term Corp.
Vanguard S-T Govt. ($61; VGSH)
0.1
0.7
0.12
Short-Term Govt.
Returns through Aug. 13. 

OUR RECOMMENDED MUTUAL FUNDS
Through Aug. 13, our Growth Portfolio has gained 17.8% so far this year, versus 17.1% for its benchmark portfolio. The Conservative Portfolio is up 15.7%, versus 11.6% for its benchmark.
-- Year-To-Date --
--- % Of Portfolio ---
 
Fund (Price; Ticker)
Return
(%)
Rank
Conser-
vative
(%)
Growth
(%)
Fund
Rating
Artisan International ($28; ARTIX)
13.8
A
6
6
98
Dreyfus Midcap Index ($35; PESPX)
22.1
C
0
0
60
Dreyfus Small Cap Stock Index
($28; DISSX)
25.4
B
0
0
84
Fidelity High Income ($9; SPHIX)
2.5
C
6
5
65
Homestead Small Company
($34; HSCSX)
25.0
B
5
8
100
PIMCO Total Return ETF
($105; BOND)
(2.3)
C
7
0
NA
T. Rowe Price New Horizons
($44; PRNHX)
32.0
A
9
9
99
T. Rowe Price Value
($33; TRVLX)
24.8
A
7
8
94
Thompson Bond ($12; THOPX)
1.0
A
6
0
95
Vanguard 500 Index ($157; VFINX)
20.3
C
6
7
74
Vanguard Dividend Growth
($20; VDIGX)
20.5
C
12
12
96
Vanguard GNMA ($10; VFIIX)
(3.1)
D
0
0
66
Vanguard Growth Index
($43; VIGRX)
17.6
D
11
11
81
Vanguard Inter.-Term Tax-Exempt
($14; VWITX)
(3.3)
C
0
0
65
Vanguard Selected Value
($27; VASVX)
27.4
A
5
7
98
Vanguard Short-Term Invest.-Grade
($11; VFSTX)
(0.1)
C
0
0
84
Vanguard Total Bond Mkt. Index
($11; VBMFX)
(2.8)
D
0
0
29
Vanguard Total Int'l Stock Index
($16; VGTSX)
6.6
E
4
4
27
Vanguard Wellesley Income
($25; VWINX)
5.1
B
0
0
95
Vanguard Wellington ($38; VWELX)
12.8
A
6
9
95
Wasatch International Growth
($28; WAIGX)
17.2
B
5
7
100
Wells Fargo Advantage Discovery
($32; STDIX)
27.7
A
5
7
93
* Year-to-date ranks through Aug. 13 from Morningstar, comparing performance among funds with same objectives. A = top 20%; B = next 20%; C= middle 20%; D = next 20%; E = bottom 20%. Fund ratings are percentile ranks based on our fund-rating system.

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