While many think investing primarily involves the stock market, it's important to remember the bond market is significantly larger. The total value of U.S. stocks is about $20 trillion, while the bond market is more than $40 trillion. Bonds essentially are loans, either to governments or corporations, and investors are repaid their money with interest over time. Anyone at or near retirement should understand the appeal of bonds as part of a fixed-income portfolio designed to deliver regular paychecks. Relying on income is one of the most powerful ways to protect your nest egg and help meet retirement needs. Here are seven top exchange-traded funds with different income strategies to consider.
iShares iBoxx Investment Grade Corporate Bond ETF
With more than 1,000 high-quality bonds from top names including Goldman Sachs Group (GS) and Verizon Communications (VZ), the LQD ETF is a logical starting point for fixed-income investors – and with more than $32 billion in assets, it's a popular one, too. Although the holdings are deep, the bias of this ETF is toward banking stocks, with roughly 27 percent of the portfolio in this sector. That's a hazard for many investment grade bond funds, since financials are among the most frequent users of the bond market to raise capital. That's something to be aware of if you want to watch your exposure to banks.
Fidelity Low Duration Bond Factor ETF
With talk of interest rates rising, many investors are worried about the loss of principal value in their bond funds. Older bonds can become less valuable as new bonds offer better returns, so a fund moving out of long-term corporate bonds may take a hit if rates move steadily higher. This Fidelity fund focuses on the most short-term investments. It features corporate and government bonds that mature in three years or less. At present, top holdings including bonds from the National Australia Bank (NABZY), domestic automaker Ford Motor Co. (F) and the U.S. Treasury. It yields a bit less, but is also less exposed to interest rate risk.
iShares 1-3 Year Treasury Bond ETF
If you really want to be low-risk with your fixed-income portfolio, then look to this short-term bond fund that is one of the best Treasury ETFs. Not only is the U.S. government the most bulletproof borrower, the fact that these bonds mature in three years or less means it is pretty much a sure thing investors are going to get paid. On the flip side, that also means there's not much of a risk premium here so the yield is more modest. However, fixed-income portfolios are as much about capital preservation and certainty as they are about generating a regular payday – and SHY has certainty in spades.
SPDR Bloomberg Barclays High Yield Bond ETF
The flip side of low yield and low risk is higher yield bonds with higher risk. And the go-to vehicle for high-yield or junk bonds, JNK, commands more than $8 billion in total assets focused on bonds from companies with less-than-stellar credit. There's more risk in these businesses that include telecom Sprint Corp. (S) and hospital conglomerate HCA Healthcare (HCA). But the bonds offer a higher rate of return as a result. JNK is an attractive investment if you are willing to be more aggressive in your hunt for fixed income. The fund does its best to mitigate potential default losses through wide diversification among more than 860 different holdings.
Pimco 0-5 Year High Yield Corporate Bond ETF
This fund is a way to split the difference and go for the higher return of junk bonds but the lower risk profile inherent with shorter maturities. HYS is built with high-yield corporate loans but only those that come due in five years or less. The fees here are a bit higher than your typical index fund at 0.56 percent or $56 annually on every $10,000 invested. However, this is one area where a good manager can make a big difference – and it's still relatively cheap considering you get a sophisticated strategy and a diverse portfolio that includes a small slice of the international bond market.
Vanguard Emerging Markets Government Bond ETF
This broad fund is a diversified way to invest in emerging-market debt through a diversified portfolio of more than 1,000 individual bonds, as well as pay a low expense ratio of just 0.3 percent or $30 a year on each $10,000 invested. Adding an international flavor to your fixed-income portfolio brings an added layer of geographic diversification and slightly higher yield thanks to the riskier nature of emerging markets like China, Mexico and Indonesia. And investors may find a bit more income potential here thanks to the risk premium.
iShares Core U.S. Aggregate Bond ETF
If you can't decide how to balance yield and risk, consider AGG – one of the 10 largest ETFs on Wall Street and one of the most popular fixed-income options. This fund offers broad exposure to U.S. investment-grade bonds, including Treasury bonds, agency mortgage debt from government-backed entities like Fannie Mae and Freddie Mac and corporate bonds from highly-rated firms like JPMorgan Chase & Co. (JPM). There is built-in diversification and a focus on lower risk. AGG also offers a scale and liquidity that appeals to investors as the fund boasts almost $58 billion in assets and regularly trades north of 4 million shares each day.