Two Good New Bond Buys

03/05/2009 1:00 pm EST

Focus: ETFS

Doug Fabian

Editor, Successful ETF Investing, ETF Trader's Edge, Weekly ETF Report, and ETFU.com

Doug Fabian, editor of High Monthly Income, says two ETFs representing different kinds of bonds represent good value in this turbulent market.

We've been flirting with the idea of buying investment-grade bonds for some time. Now, however, the waiting is over.

SPDR Barclays Capital Municipal Bond (NYSEArca: TFI) seeks results that correspond generally to the price and yield performance of an index that tracks the US municipal bond market. It also provides income that is exempt from federal income taxes.

This tax-exempt benefit is why you want to hold TFI only in your taxable accounts, and not in your retirement accounts. You get no benefit by putting this fund in a retirement account, [but] in a taxable account, TFI is a great way to get income from tax-exempt municipal bonds.

TFI uses a passive management strategy designed to mimic the price and yield performance of the Barclays Municipal Managed Money index. The index tracks the US long term, tax-exempt bond market, including state and local general obligation bonds, revenue bonds, pre-refunded bonds, and insured bonds.

I view TFI as a great proxy for the overall muni bond market. There has been a lot of volatility in this sector, but the fund has moved nicely in 2009. Dividends are paid monthly with an allocation to TFI, and I always like to have income-generating assets that allow us to ring the register each month.

The current yield on TFI is 3.79%, a very nice yield in this stable and reliable bond market segment. (The ETF closed below $22 Wednesday-Editor.)

Now, if you are using a non-taxable account, such as an IRA, then your choice of investment-grade bond fund should be the iShares Barclays Aggregate Bond Fund (NYSEArca: AGG). This fund seeks investment results that correspond to the price and yield performance, before fees and expenses, of the total United States investment-grade bond market as defined by the Barclays Capital US Aggregate index.

The fund invests approximately 90% of assets in the bonds represented in the underlying index and in securities that provide substantially similar exposure to securities in the underlying index.

The fund recently pulled back to its 50-day moving average [slightly above $100]. This is the pullback I have been waiting for in AGG, and I think that now we have reached a relatively low-risk buying opportunity in investment-grade bonds.

As with TFI, dividends are paid monthly with an allocation to AGG. The current yield on AGG is 4.64%, once again a very nice yield in this stable and reliable bond market segment. (The ETF closed above $100 Wednesday-Editor.)

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