Investment bonds are a bit different to stocks, they allow the investor to invest capital as a loan that yields a fixed income. They are considered to be one of the safest investments on the market.
Investing in bonds can be a safe way of building your savings in the long term. The type of bonds we will be focusing on are:
- Government/Treasury Bonds
- Corporation Bonds
- Municipal Bonds
- Debt Securities
- And… Bond ETF’s
As we run through this list of investment bonds, we will evaluate possible gains to be made, bond security ratings from Moodys and Standard & Poor’s, our opinions on how to use the bond/bond ETF in your portfolio, then we’ll move onto how to actually buy bonds on the live market.
We will provide the relevant data for you to make a decision on whether or not buy these bonds, our main goal is to provide you with safety when investing, and to point out potential risk factors.
9 Investment Bond ETF’s you Should Watch
|1 Year Return||8.80%|
|1 Year Trailing Dividend Yield||2.46%|
|5 Year Cumulative Return||17.52%|
|Inception Date||Sep 22, 2003|
|Assets Under Management ($Billions)||$75.52|
As with all ETF’s, this bond ETF tracks the movement of an underlying index. For this particular bond ETF, the underlying index is the Bloomberg Barclays US Aggregate Bond Index.
This index measures the performance of all US investment-grade bonds. It only includes bonds with an investment rating of BBB and above.
Of AGG’s $76-billion holdings, 70% of the securities held are AAA rated, and half are government issued bonds. Currently as of June 2020, 39% of AGG’s holding are in US Treasury bonds, the safest form of investment.
This low cost ETF gives you broad exposure to US investment grade bonds. With the very generous dividend yield, you can use this bond ETF to boost your portfolio income while stabilising your risk.
|1 Year Return||9.79%|
|1 Year Trailing Dividend Yield||2.31%|
|5 Year Cumulative Return||21.79%|
|Inception Date||Apr 3, 2007|
|Assets Under Management ($Billions)||$269.0|
Following on, the Vanguard Total Market Bond ETF tracks the Bloomberg Barclays US Aggregate Float Index. The funds top holdings include Federal National Mortgage Association bonds, Treasury notes, and Treasury Bonds.
Much like AGG, BND only holds bonds with an investment rating of above BBB. BND however, invests internationally, but only if the bonds are dollar-denominated. This allows for more protection against local economic struggle.
Vanguard itself rates this bond ETF at a risk level 2 out of 5, but this obviously means with less risk, comes less reward.
The majority of this ETF’s holdings are in US Government bonds (60.8%), then the remainder of the assets are categorised as follows:
|Bond Rating||Allocation of Holdings (%)|
|US Government Bonds||60.8%|
With such a large proportion of Baa bonds in this ETF, it can lead to more volatility, however in a bull market these bonds can produce huge yields.
The distribution of these bonds is very safe, with the top three issuers of bonds in this ETF:
- Treasury/Agency = 41.7%
- Government Mortgage Backed = 23.2%
- Industrial = 17.6%
These are the safest investments you can make in the market, and with an average bond maturity of 3 – 5 years, the managers of this ETF put safety of capital before anything else.
|1 Year Return||6.74%|
|1 Year Trailing Dividend Yield||3.04%|
|5 Year Cumulative Return||19.49%|
|Inception Date||Jul 22, 2002|
|Assets Under Management ($Billions)||$54.02|
This bond ETF is a little different to the earlier ETF’s above. The iShares iBoxx $ Investment Grade Corporate Bond ETF focuses its capital on dollar-denominated corporate bonds with a bond rating of BBB or higher.
Some well known companies this ETF holds are General Electric, Anheuser-Busch, Microsoft, and Goldman Sachs. The top ten holdings in this ETF only amount to 3.4% of its total $54-billion assets. It is well diversified and has holdings over 12 sectors.
This iShares bond ETF is weighted towards banking, non-cyclical consumer products, and communications. Which make it very stable during both bull and bear markets, the fund split between sectors is below:
|Sector||Fund Weight (%)|
|Cash or Derivatives||1.06%|
This gives the investor exposure to 1000+ high quality corporate bonds all of which are investment grade. As mentioned before, because this fund is weighted in low volatility sectors, and also essential product sector, it offers a stable price through both bull and bear markets.
LQD also holds bonds for considerably longer than other examples in this list. Over 25% of bonds held have a maturity over 20 years, and 54% have a maturity of between 5 and 10 year. The overall average for weighted maturity is 13.1 years.
This bond ETF also holds the most BBB rated bonds thus far, with 46% of holdings BBB rated, 40.6% rated A, 8% rated AA, and only 2.4% rated AAA. These are still investment grade bonds, but because they are corporate bonds, the risk associated with the investment is greater when compared to government issued bonds.
|1 Year Return||10.2%|
|1 Year Trailing Dividend Yield||1.5% – 2.5%|
|5 Year Cumulative Return||61.2%|
|Assets Under Management ($Billions)||N/A|
This bond portfolio is a little different… Patryk Peltonen is a highly successful bond trader on the investing platform eToro. He has consistent gains ranging between 9.4% and 11.3% per year.
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Peltonen has a fantastic track record in buying and selling bonds on eToro. In the last 12 months, he has built a net gain of 10.2%.
He invests in a wide range of government bonds, corporate bonds, and debt securities. All of high quality, however he does set aside a small proportion of his portfolio for more speculative investments in bonds with lower grades.
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|1 Year Return||1.09%|
|1 Year Trailing Dividend Yield||1.16%|
|5 Year Cumulative Return||5.36%|
|Inception Date||Oct 5, 2007|
|Assets Under Management ($Billions)||$0.754|
the SPDR Bloomberg Barclays International Treasury Bond ETF has significant exposure in Europe. The fund also invests in emerging markets such as Japan and Canada. It tracks the Bloomberg Barclays Global Treasury Ex-US Capped Index.
The European countries involved in the ETF are:
It is important to note that the funds investments are denominated in the local currencies, meaning a weak US Dollar could be an advantage.
The assets held in the fund are all Treasury bonds or Treasury notes, with the highest weighted holding in a Chinese Treasury bond CGB at 1.86% of the funds capital.
The fund managers are Jim Cramer & Joanna Madden, both are highly recognised investors and hold a wealth of accolades in financial & economic studies.
If you want to diversify outside the US, this is a great fund to get involved in. By only investing in international Treasury bonds, the fund has very low risk. Unfortunately this means lower reward, but bond portfolios are meant to balance your risk and hedge against higher margin investments.
|1 Year Return||9.40%|
|1 Year Trailing Dividend Yield||2.3%|
|5 Year Cumulative Return||31.4%|
|Inception Date||Nov 19, 2009|
|Assets Under Management ($Billions)||$31.5|
VCIT is a corporate bond fund focusing on intermediate term bonds, 94.4% of the bonds held mature between 5 and 10 years, with the remaining assets maturing in under 5 years. This is common for intermediate term funds.
The fund only buys investment grade bonds over BBB rating. But 53.6% of the bonds held in the fund during 2019/20 were BAA rated, which is on the lower end of the spectrum. The returns therefore have been volatile over the last year.
VCIT only invests in these 3 sectors:
These industries are relatively calm making dividend yields consistent and price stagnant. Some of the largest holdings in this fund are, Verizon, Diamond 1 Finance Corp, and JP Morgan Chase & Co.
Intermediate bonds hold more risk than long term bonds, especially when they are corporate. However the companies in this fund are high quality, and the allocations are well diversified.
|1 Year Return||7.29%|
|1 Year Trailing Dividend Yield||0.94%|
|5 Year Cumulative Return||N/A|
|Inception Date||Mar 20, 2018|
|Assets Under Management (€Billions)||€14.82|
A very young fund with huge potential is how I would categorise this bond ETF. Based in Europe, it exposes investors to more diverse markets allowing them to manage risk better.
This fund seeks to track the performance of an index composed of Euro denominated investment grade corporate bonds. So again, this fund only invests in bonds graded BBB or higher.
Because of the 2020 correction in the market due to the Covid-19 virus, you might think this fund was off to a rough start. However the returns beat inflation at a time of market depression, showing how well it is managed.
With most corporate bond ETF’s, it has a major focus on the banking and non-cyclical consumer sectors, which make up 43.7% of this funds portfolio. As well as focusing on stable sectors, the fund keeps a medium term bond maturity, holding a weighted average maturity of only 5.6 years.
The only highlighted feature of this fund which may make investors hesitant to buy is, the majority of bonds held are of the lowest investment grade:
- BBB = 53%
- A = 36%
- AA or AAA = 10%
- Cash or Derivatives = 1%
Although all of these bonds are investment grade, some investors would prefer a more solid platform for bond investments. Only a select few corporate bonds are rated AAA, hence why government bonds are so popular.
|1 Year Return||1.5%|
|1 Year Trailing Dividend Yield||4.67%|
|5 Year Cumulative Return||N/A|
|Inception Date||Jan 11, 2018|
|Assets Under Management ($Billions)||$0.159|
The Xtrackers Low Beta High Yield Bond ETF aims to match the performance of the Solactive USD High Yield Corporates Total Market Low Beta Index.
This fund has a bit of a different focus to the other in this article. It is all about yields, which can mean higher risk.
The fund has the majority of its capital in consumer driven sectors:
- Consumer Discretionary = 20.51%
- Energy = 12.8%
- Communication Services = 10.57%
- Health Care = 9.91%
Being largely involved in these consumer driven sectors can lead to volatility in times of market depression. For these company types the overall economy needs to be strong.
However, as I’ve mentioned, with higher risk comes higher reward. The monthly dividend paid from this yield is quite volatile, in the past year the dividend payments have been in the range $0.183 and $0.202 per share.
Here is the alert you need to be aware of with this fund. Only 16% of the bonds in this fund are investment grade. 70% of the bonds are graded BB, and 14% are graded B or below. These bonds below the BBB grade are considered ‘Junk Bonds’, and are speculative investments.
Personally, I think there are more categories, I still think you should stick to investment grade bonds, but for a small part of your portfolio you can invest in what I call ‘Lower Grade Investment Bonds’ which are graded between BB and BBB.
|1 Year Return||3.94%|
|1 Year Trailing Dividend Yield||5.21%|
|5 Year Cumulative Return||N/A|
|Inception Date||Jun 12, 2018|
|Assets Under Management ($Billions)||$0.104|
FDHY invests 80% of its capital in high yield bonds in the attempt to gain a high level of income and capital appreciation. Currently the funds top holdings are from the healthcare services and finance companies.
The grade of the bonds in this fund are categorised below:
- Investment Grade = 1.07%
- High Yield Intermediate Grade = 87.96%
- Not Rated/Cash Holdings = 10.97%
This fund focuses on high yield investments, yes this is a higher risk strategy, but it can yield much higher income through dividends.
The fund also takes advantage of intermediate term maturities, with an average maturity of 4.37 years.
Another thing you might notice about this fund is the high cash holdings. It is not common for a bond ETF to hold 10% of its capital in cash, it is not even common for a bond ETF to hold 1% of its capital in cash. I expect this to change later in the funds life, however they might be hesitant incase of a mass selloff in the early days of growth.
Watch this fund over the next couple of years to see where it goes.
So there you have it, here are the 9 best investment bond ETF’s for you to watch over the next couple of years. I think it is very important for people to consider bond investments, if not to reduce risk in your portfolio, to increase your fixed income year to year.
Why You Should Buy Investment Bonds
There are a lot of reasons investors buy bonds, some investors build portfolios only for bonds. But, because they are the one of the safest forms of investment, many people use bonds to lower risk across their portfolio. This is also a way to build your savings using a safe method.
Investors that buy shares in a company, will often buy corporate bonds for that company or sector. This is because if the company defaults, or is heading for liquidation, the bondholders are more likely to get their capital back, before the shareholders.
The main 2 reasons people invest in bonds is to diversify where their money is held, and to beat low interest rates offered by bank savings accounts.
As well as being some of the safest investments, they are also a great way to diversify your portfolio.
When a recession hits, many investors move out of liquid equities and into bond investments. This is a safe haven which reduces risk when companies are struggling. Bonds offer a more stable price, and overall will lower your portfolio volatility.
In a bull market, bonds are also a great way to increase your fixed income when the price of stocks are overvalued.
Beating Interest Rates
When interest rates are high, there is no real benefit from investing in bonds, the broader market will beat the bond rate. However when interest rates are low, bonds become more valuable.
When interest rates are low, more people are likely to invest in bonds, which drives the price up, this is because bond yields beat interest. So this is great for investors that wish to hedge against interest movements.
How to Invest in Bond ETFs
I would recommend going with an online broker, the fees are massively discounted and sometimes completely free. Also you get a better conversion rate if your base currency doesn’t match the denominated fund currency.
eToro is my number 1 pick for buying ETFs and bond ETFs, not only is it free, you can do things like ‘Copy Portfolio’, or build your own. If you want to see my full review of eToro you can click the button below.