A Trio of Fixed-Income ETFs

11/28/2016 10:00 am EST


Fixed income investments are probably the most boring investments in the world. And they’re often ignored for the more glamorous world of equities, observes Jason Williams, editor of Energy and Capital.

But when it comes to protecting your money and providing a steady stream of income, there’s nothing better.

Even if you’re far from retirement, you can benefit from having a safer place to park and grow money you don’t plan to use immediately.

Thanks to the days of electronic trading via the Internet, there’s a simple way for retail investors to get in on the bond action: ETFs.

But these aren’t your typical ETFs that invest in a basket of stocks. No, no. These funds keep a rotating stable of corporate and government debt and share the rewards with shareholders.

Treasury bills

Treasury bills are backed by the full faith and trust of the United States government. This makes these securities practically risk-free.

I say "practically" because there’s still the risk that inflation will mean your dollars aren’t able to buy as much when you get them back as they were when you put them in. But you can rest assured you’ll get them back, and you’ll also get your interest paid when it’s due.

The best short-term Treasury bang for your buck is going to come from the iShares 1-3 Year Treasury Bond Fund (SHY).

As the name would suggest, it invests in T-bills with maturities between one and three years. The majority of these come due around the same time, so there’s no worry that high interest rates will cut into your principle.

Municipal bonds

Like U.S. Treasuries, muni bonds are backed by the government — in this case, a state. They’re usually issued to generate cash to make improvements to roads, bridges, and other state-maintained.

They’re not quite as risk-free as Treasuries, but they still offer a lot of default protection. The best bet for the retail investor comes in the form of the iShares Short-Term National Muni Bond ETF (SUB).

It invests in a smattering of bonds from solid state governments across the United States and pays investors a 0.76% yield coupled with three-year average returns around 1%. Not a high-flying stock investment, but also not nearly as risky as equities.

Corporate Bonds

Issued by companies in an effort to drum up cash for internal investment, these bonds are a little riskier than those of state and national governments, but they still offer protection against default.

Holders of these are entitled to some of the firm’s assets in the case of a bankruptcy. They also pay higher yields to compensate for the somewhat increased risk.

When it comes to ETFs for corporate bonds, you can’t get much better than the Vanguard Short-Term Corporate ETF (VCSH).

It holds debt from some of the best and most solid companies in the U.S., so your risk of default is very low. And an investment in this fund scores you a 2.03% yield along with a three-year average return of 2.62%.

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By Jason Williams, editor of Energy and Capital

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