Think 4.6% yields on 10-year Treasuries look good? Market pros found safe ways you can do even better using bond ETFs.
ETFs owning less obvious bonds, such as shorter-term Treasuries, senior loans, single maturities or high-quality corporate bonds, can beat plain 10-year Treasuries on risk or return. Plus, new cheaper Treasury bond funds can save money on fees.
How's a 7.5% yield on senior loans with priority treatment sound? What about a 5% yield on Treasuries that mature in less than 10 years? You can even find 5.8% yields on bonds from high-quality companies.
"Investors have turned to bond ETFs for their liquidity, ease of use and low costs compared to other ways to earn fixed income," said Todd Rosenbluth, head of research at Vetta Fi.
Money Pours Into Bond Funds
Plump yields are giving stocks a run for their money.
The S&P 500 dropped 7% since July 28. That fall is no coincidence. It corresponds to a big spike in the 10-year Treasury yield from 2.6% to 4.6%.
Many investors figure that's enough return for taking no risk on stocks. More than 20% of U.S. investors think a savings account is the best long-term investment, says an IBD/TIPP poll held in September. That's higher than the 18% who prefer stocks.
Investors are voting with their money. As of Sept. 22, bond ETFs gathered $135 billion in 2023, Rosenbluth says. That's 42% of the U.S. ETF industry's net inflows.
But you likely can do even better than the 10-year Treasury.
Look At Senior Loans
ETFs that own loans with priority in case of financial distress are turning into sleeper hits.
Three of the top-five performing bond ETFs this year all focus on such senior loans, says Morningstar Direct. Investors get higher yields and solid gains. The Pimco Senior Loan ETF gave investors a total return of 9.02% this year. It sports an SEC yield of 7.5%. Another option is Invesco Senior Loan ETF. It returned 8.9% this year and yields 8.5%.
Both top the broad iShares Core US Aggregate Bond ETF, loaded with Treasuries, which delivered a year-to-date negative return of 0.9%. It yields just 4.5%.
"We like floating rate loans, particularly in private credit," said Jack Ablin of Cresset Capital. "BKLN to me is the closest approximation of private credit.
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Focus On Bond Maturities
A knock against bond ETFs is that they own bonds of many different maturities. The ETF must buy new bonds to replace maturing one. This can create disappointing returns amid rising rates.
Newish ETFs like BondBloxx Bloomberg One YearX and RBB US Treasury 12 Month solve this by locking in single maturities, Rosenbluth says.
Seek Quality Corporates
Following a downgrade in U.S. credit, Treasuries are no longer "risk free." Some companies are arguably more financially responsible. There's a shot at higher returns, too, Rosenbluth says.
Take Vanguard Intermediate-Term Corporate Bond, he says. It yields 5.8%, contributing to its Treasury-beating total return this year of 0.75%.
Go Short With Bonds
Don't assume locking up 10-year Treasury rates is your best bet. ETFs that own shorter-term bonds yield more right now. You can take advantage of higher short-term yields with added credit risk with iShares 1-3 Year Treasury Bond, Rosenbluth says. It yields nearly 5% and returned 1.5% this year.
Don't Overlook Fees With Bond ETFs
You can buy Treasuries for free directly from the U.S. Treasury. Still, low-cost Treasury ETFs are charging next to nothing and are easier to manage.
Charles Schwab just slashed the annual fee on its Schwab US TIPS ETF to just 0.03%. None of its bond funds charge more than that. That's all you'd pay for iShares Core US Aggregate Bond ETF, too.
Yes, yields look good now. But why settle for the 10-year Treasury?
"The Federal Reserve may continue to raise interest rates, which could put pressure on the price of the bonds inside ETFs," Rosenbluth said. "Investors need to ensure they are taking on the risk they can stomach."
Bonds Better Than 10-Year Treasuries?
ETFs that tap the market for bonds in unique ways
| Bond type | ETF example | Symbol | Assets ($ billions) | Fee | SEC yield | YTD return |
|---|---|---|---|---|---|---|
| Private credit | Invesco Senior Loan | $4.9 | 0.65% | 8.53% | 8.95% | |
| High-quality corporate | Vanguard Intermediate-Term Corporate | $38.9 | 0.04 | 5.76 | 0.75 | |
| Single maturity | BondBloxx Bloomberg One Year | $0.5 | 0.03 | 5.34 | 2.70 | |
| Low cost | Schwab US TIPS | $11.5 | 0.03 | 5.21 | 0.78 | |
| Short-term Treasury | iShares 1-3 Year Treasury | $25.7 | 0.15 | 4.97 | 1.50 |
