ETFs and the New-Look Bond Market

While bonds are back, investors must learn to avoid land mines while hunting for yield.

A bit of perspective may be useful as rising bond yields change investing: We were 14 years younger last time yields were this high, meaning that for many of us, this is unseen territory. 

Call it the new-look bond market. The yield on the 10-year U.S. Treasury bonds climbed back above 4% mark in October. The last time it was there? October 2008, in the heat of the global financial crisis.  

Years of suppressed interest rates had rendered bonds a far less useful pairing alongside equity investments than in decades past. That’s changed, as yields on U.S. Treasury and higher quality corporate bonds approach respectability.  

At the same time, key players in markets have emerged while others have faded. Algorithmic traders, index fund dominance and artificial intelligence have altered how we invest.  

Some investors choose to buy individual bonds and lock in the rates of interest they pay for a stated period of time. However, inflation is now much higher than it was, and can potentially move much higher in the years ahead. That’s a threat today’s bond investors probably have not had to confront before.  

Here are a few ETFs that may help introduce or reacquaint yield-seekers with today’s changing environment: 

Invesco 1-30 Laddered Treasury ETF (PLW) 

This fund spreads its bond holdings across nearly the entire U.S. Treasury Bond “yield curve.” Other than Treasury bills, which mature one year or less from when they were issued by the government, PLW covers the rest, from one year out to 30 years until maturity. This ETF debuted in 2007, and has amassed $634 million in assets. The fund’s portfolio provides a “bond ladder” approach, which means that about 1/30 of the fund is invested in bonds that mature each year from 2024 through 2053. PLW has returned 4.8% so far this year, tracking at more than 1% per month so far. 

iShares iBoxx $ Investment Grade Corporate Bond ETF (LQD)  

This fund aims to provide blanket coverage of the corporate bond market. While Treasury ETFs invest in what are assumed to be the highest quality bonds, high quality corporates are rated either AAA, AA, A or BBB. Anything below BBB is considered to be in the high yield or “junk” bond category. Investors in corporate bonds in general, and in LQD specifically, should be aware of the fact that a large percentage of these types of bonds now sit in that lowest BBB category, which could represent a significant risk if interest rates remain high and renewed concerns about bond market credit conditions resume. About half, 47%, of LQD’s holdings are rated BBB, and less than 11% fall into the AAA or AA categories. 

iShares Core US Aggregate Bond ETF (AGG) 

This fund provides a middle ground between Treasury and corporate bonds. It allocates to a mix of both. This $90 billion ETF debuted in 2003, and is considered by many to be a proxy for the broader bond market. About 70% of AGG is in Treasuries, with the rest in corporates. Only about 13% of the total portfolio here is rated as low as BBB. AGG is up 3.8% so far this year, following a historically poor 2022, where Fed rate hikes caused it to drop by 13%. 

Bonds are back, but like the stock market, this part of the investing world is operating differently than in the past. The continued creation and growth of ETFs to help investors slice and dice this huge market segment into more dedicated pieces is a timely development, now that yields are high enough to again hit the radar of investment pros and self-directed types.