Fight Low Rates in 2013 With These Bond ETFs
The iShares Barclays 20+ Year Treasury Bond ETF (NYSE: TLT) and some other funds focused on Treasuries were on the receiving ends of post-election bounces on Wednesday. With investors departing equities and other riskier assets in force, U.S. Treasuries offered shelter from the storm on a day in which the market let the world know it was not pleased with the result of Tuesday's presidential election.
The problem for bond investors remains that regardless of the election's outcome, U.S. interest rates are expected to remain low until at least 2015. Federal Reserve Chairman Ben Bernanke said as much just two months ago when the third round of quantitative easing was announced.
Still, bond funds have seen robust inflows this year. Last month, the total was $4 billion, according to Morningstar data. That does not mean all those inflows are heading to boring Treasuries ETFs. Nor does finding superior bond yields mean investors have to take on excessive in the form of low credit quality. The following ETFs prove as much.
WisdomTree Australia & New Zealand Debt Fund (NYSE: AUNZ) Investors that opt for an ETF such as the WisdomTree Australia & New Zealand Debt Fund over a Treasuries fund are making a decent trade and the good news is that trade does not mean added risk. AUNZ's distribution yield is 3.43 percent compared to 2.59 percent for AUNZ, but Australia has an AAA credit rating. The U.S. does not. New Zealand is rated AA.
As such, all of AUNZ holdings are rated AAA and AA. The risk here is of the currency varietal as AUNZ's holdings are denominated in Australian and New Zealand dollars meaning U.S. dollar strength could weigh on this fund.
Market Vectors Preferred Securities ex Financials ETF (NYSE: PFXF) Common jargon refers to preferreds as stocks, but the asset class has intimate ties to the bond universe as well. Remember, a company that misses payments on preferred dividends risks damage to its corporate credit rating.
Specific to the Market Vectors Preferred Securities ex Financials ETF, the newly minted fund stands out from the crowd of preferred ETFs for two reasons. First, its expense ratio of 0.4 percent is the lowest in the group. Second, it is the only member of the group to not feature an excessive weight to preferred stocks issued by banks. Top holdings include issues from General Motors (NYSE: GM), United Technologies (NYSE: UTX) and Apache (NYSE: APA).
PFXF has a 30-day SEC yield of 6.2 percent and pays a monthly dividend. The credit rating breakdown is as follows: 48.1 percent of the holdings are investment grade while 18.6 percent are junk. The remainder of the fund's holdings are not yet rated.
PowerShares Build America Bond Portfolio (NYSE: BAB) The PowerShares Build America Bond Portfolio was predicted to be a winner under an Obama reelection scenario and that is exactly what happened. Two trading days after the election and BAB is up both days.
It is easy to understand why. President Obama wants to make the Build America Bonds program a permanent fixture, but the program was seen as vulnerable if he lost reelection. That worry is in the past. Now investors can enjoy BAB's monthly dividend, a trailing 12-month yield of 4.8 percent and high-quality holdings. Eighty-nine percent of BAB's portfolio has ratings ranging from A to AAA.
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