When it comes to generating income in retirement, or for those that are nearing retirement age, bonds are an important part of the equation. For many folks that are well into retirement, conventional wisdom has been that the bulk of their fixed income portfolios belong in U.S. Treasuries due to perceived safety.
That perceived safety increases the allure of an ETF such as the iShares Barclays 20+ Year Treasury Bond Fund (TLT). TLT, which has an average maturity of 27.6 years, is alluring to conservative investors because its 0.15 percent expense ratio and a trailing 12-month yield of 2.71 percent. These days, that is actually decent.
The iShares Barclays Treasury Inflation Protected Securities Bond Fund (TIP) is another popular option for the same reasons. TIP is perceived to be safe, the expense ratio of 0.2 percent is fair and the trailing 12-month yield of almost two percent is better than a money market account.
The good news for retirees looking for income from bonds is that there are scores of ETFs on the market today that provide higher yields and more income than Treasury funds without the burden of taking on large amounts of risk.
SPDR Barclays Capital Long Term Corporate Bond ETF (LWC) The SPDR Barclays Capital Long Term Corporate Bond ETF represents a credible alternative to the larger iShares iBoxx $ Investment Grade Corporate Bond Fund (LQD). The average maturity of LWC's holdings is almost 24 years, nearly double that of LWC's holdings. As such, LWC has a 30-day SEC yield of about 4.2 percent compared to 2.74 percent.
Over 53 percent of LWC's holdings are rated at least A and the fund has the same expense ratio, 0.15 percent, as LQD.
PowerShares Emerging Markets Sovereign Debt Portfolio (PCY) Several years ago, recommending an emerging markets bond fund to retirees may have been viewed as heresy. That has changed as the sovereign debt ratings of many developing nations have risen while developed markets such as France, Japan and the U.S. have lost the prestigious AAA rating.
That said, owning PCY does mean incurring more risk than holding TLT or TIP. PCY's lineup is more in investment-grade territory, but 54 percent may not be enough for some investors. A 30-day SEC yield of almost four percent and a monthly dividend help compensate investors for the added risk. So does capital appreciation. Over the past two years, PCY has returned 25.4 percent, including dividends paid, with volatility of just 5.7 percent.
iShares S&P National AMT-Free Municipal Bond Fund (MUB) A municipal bond ETF such as the iShares S&P National AMT-Free Municipal Bond Fund is best kept in a taxable account so that investors can withdraw funds before retirement if need be. Municipal bonds are attractive because these bonds are usually exempt from federal taxes and many are not subject to state and local taxes, either.
The trade-off with MUB is that the ETF's trailing 12 month yield is below three percent. On the bright side, investors gain the benefit of a monthly dividend and a portfolio where about nine out of 10 holdings are rated at A- or higher.
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