How To Beat Bond ETF Returns Without More Risk

March 30, 2017

Want to earn more without taking on more risk? Though I generally tell clients they can’t, when it comes to fixed income, they actually can.

First, I’m an advocate of bonds needing to be high quality. My advice to clients is to take their risk with equities and let their bonds be boring. I caution them against repeating the same mistake as in 2008 of trying to earn an extra 0.50% annually by taking on a ton of default risk. That’s why I like these high-quality low-cost intermediate-term ETFs:

Symbol Fund SEC
Yield
Duration Avg
Maturity
AGG iShares Core U.S. Aggregate Bond Index 2.40% 5.8 8.09
BND Vanguard Total Bond ETF 2.54% 6.0 8.20
IEF iShares 7-10 Year Treasury ETF 2.26% 7.6 8.37

 

The first two ETFs are roughly 64% U.S. government-backed (with the rest being investment-grade corporate), while the last is fully backed by the U.S. Treasury. The Treasury fund IEF yields a tad less, as all interest is state tax deductible if in a taxable account. All are intermediate-term.

But if you want more, consider buying brokered certificates of deposit in the secondary market. Below is a graph of all 1,753 noncallable FDIC-insured CDs that were available at Fidelity. Note the higher yields at comparable maturities, especially on the longer end.

 

 

 

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