08) Exchange-Traded Funds: Fixed-Income and Asset-Allocation ETFs

by · October 16, 2010

Exchange-traded funds providers have long since broadened their coverage with offerings of bond ETFs and asset allocation ETFs, instead of solely equity ETFs.

Fixed-Income ETFs, Bond ETFs

Bond ETFs are what regular bonds are not: Liquid, transparent and rated on a stock exchange. Dividends are paid every month and capital gains, if there are any, are distributed annually.

In a bond ETF only a portion of the bonds compose the underlying index. Using factors like quality of the bond, risk-free rate and years of maturity, the bond index can be matched very closely by the fund manager using a sampling method.

Yield Curve Bond ETFs

This type of funds let investors purchase Treasury bonds at varying maturities along the yield curve. Long-term Treasury ETFs are generally good for speculation of interest rates. Short-term bond funds are better compared to money market funds because they yield a higher return.

Examples are:

  • iShares Barclays 1-3 Year Treasury Bond Fund (SHY)
  • iShares Barclays 3-7 Year Treasury Bond Fund (IEI)
  • iShares Barclays 7-10 Year Treasury Bond Fund (IEF)

Broad-Based Bond ETFs

A broad-based bond ETF is available with a composition of corporate and government bonds at varying maturities. This type of bond ETF are often found as the main components of a bond portfolio. An example of this is the iShares Barclays Aggregate Bond Fund (AGG).

Inflation Protected Bond ETFs

As the name suggests, inflation protected bond ETFs give protection against inflation. It was created to outperform regular bonds as well when inflation is expected. Usually funds like this one include the Treasury Inflation Protected Securities (TIPS) bonds in its portfolio. TIPS have an interest equal to the Consumer Price Index with an additional premium. An example of this is the iShares Barclays TIPS Bond Fund (TIP).

Asset Allocation ETFs

An ETF that has investments in varied asset classes is relatively new as opposed to balanced mutual funds, and its advantage allows investors to purchase a single ETF portfolio that is already fully diversified. An example is the PowerShares Autonomic Growth NFA Global Asset (PTO).

Target Date ETFs

The Target Date ETFs are similar to balanced asset allocation funds but with a catch – it is more conservative as the target date nears. In order to lessen the risk when the target date draws near, stocks are sold and bonds are bought.

One of the main purposes for buying target date funds is to save for retirement. It was in fact designed for investors entering into investment who only have retirement in mind. It can be good for other savings goals that involve a target date.

Target date funds is also known as Life-Cycle ETFs.

Examples are:

  • TDAX Independence 2020 ETF (TDH)
  • TDAX Independence 2030 ETF (TDN)
  • iShares S&P Target Date 2040 Index Fund (TZV)