How To Play Bond ETFs

In volatile market times, many investors have turned to cash, but cash may not be the only king. It appears that bonds, with higher yields, and their exchange traded funds (ETFs) may be a way to fine tune ones exposure.

The beauty of the bond market is that there is a plethora of choices on the market and one can fine tune his exposure to the sound of his liking. 2008 was a big year for investors in Treasury debt, but it looks like 2009’s winner may be elsewhere, perhaps in corporate debt or in municipal bonds.

Jonathon Burton of The Wall Street Journal breaks down the bonds into the following three categories:

• Broad Exposure- these generally track a benchmark for the broad U.S. investment-grade bond market. A good cheap way to play this market is through the Vanguard Total Bond Market (BND), which has an expense ratio of 0.11% and boasts a 4% yield.
• Short Term- these ETFs allow you to be cautious towards a potential increase in interest rates. A possible play here could be the iShares MBS Bond Fund (MBB), which charges 0.36% and yields 3.8%.
• Muni-Bond- These have came under scrutiny due to the massive shortfalls in revenues seen by local and state governments. The sector is a bit riskier, but will also give a higher yield. We think that this is an area to keep an eye on; after all, the infrastructure portion of President Obama’s stimulus plan will be focused on state and local governments. One play here could be the iShares S&P National Municipal Bond (MUB), which gives a 3.8% yield, tax free.

There are plenty of options out there for investors to play the field. Be cautious, do your homework and remember that you don’t always have to hit for the fences.

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