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3 Bond ETFs for Yield and Growth if Rates Stay Low - ETF News And Commentary

Although the domestic economy remains on track, investors remain skeptical of the stock market. This was truer in the light of the Fed’s dovish comments on the interest rate policy. In its March meeting, the Fed indicated that the U.S. labor and inflation numbers need more time to stabilize before the rates are hiked after staying ultra-low for more than six years.

Alongside, the Fed narrowed the growth projection of the U.S. economy for this year and the next two. If this was not enough, the Fed cut its median funds rate forecast from 1.125% to 0.625% for the end of this year.

Though the Fed eliminated the word ‘patient’ from its statement, it promised not to be ‘impatient’ in taking the vital rate hiking decision. The Fed cautioned about ‘moderation’ in U.S. economic growth and indicated that interest rates will rise at a sluggish pace than previously forecast. To make things worse, U.S. employers added the smallest number of jobs in over a year in March.

The recent surge in the U.S. dollar against the basket of currencies, an oil price slump and slowing U.S. economic growth pushed back the timeline of the first rate hike. Yields on the benchmark 10-year treasury notes slipped to 1.85% (as of April 3, 2015) from 2.24% (as of March 6, 2015) after the U.S. economy recorded a six-and-half low unemployment data (read: 5 Dividend ETFs to Buy for Income in 2015).

The situation remains tumultuous across the globe with most nations from Europe to Asia choosing easy money policies in the wake of waning growth and sagging inflation. Though stocks are flying high in the international arena backed by cheap money, investors’ minds are not free from jitters. Overvaluation concerns in the U.S. and growth worries in the rest are bothering them.

As a result, demand for fixed income securities saw a surge across the board. Investors may be looking for higher income alongside decent capital appreciation. Below, we have highlighted three selections that work for this requirement.

SPDR Barclays Capital Convertible Securities ETF (CWB)

Convertible Bonds can be exchanged at the option of the holder, for a specific number of preferred or common shares. They combine the characteristics of bonds and equities. Like traditional bonds, convertible bonds are issued at par, pay fixed coupons and have fixed maturities. And at the time of liquidation, convertible bond holders have a prior claim than the common shareholders on the company’s assets.

CWB follows Barclays Capital U.S. Convertible Bond>$500 MM Index, which is designed to represent US convertible bonds with outstanding issue sizes greater than $500 million. The fund has amassed about $2.82 billion in assets.

CWB holds 105 securities, with average maturity of 12.50 years. The fund is heavily invested in the Technology sector (42%) while Consumer Staples (17.3%) and Finance (12.15) occupy the next two spots.

The fund charges 40 basis points in expense per year and has a dividend yield of 4.45% currently. However, only about 30% of the holdings are rated Baa or higher. CWB has returned 2.3% year to date (as of April 6, 2015).

Market Vectors CEF Municipal Income ETF (XMPT)

Muni market has seen the best March since 2008 as it snapped the loss-making records this year, per Bloomberg. These bonds are nice choices for investors seeking a steady stream of tax-free income. Munis are safer bets compared to corporate bonds and yield higher than treasuries.

This overlooked choice looks to track the S-Network Municipal Bond Closed-End Fund Index. The product is composed of shares of municipal closed-end funds listed in the U.S. that are principally engaged in asset management processes designed to produce a federally tax-exempted annual yield. Notably, closed-end products are best-suited for those who seek higher income (read: Is 2015 The Year for Municipal Bond ETFs?).

The product charges165 bps in fees and has mustered an asset base of $45.2 million. The fund is up 2.4% year to date (as of April 6, 2015). The fund has a dividend yield of 5.34% as of the same date.

Wisdom BofA Merrill Lynch High Yield Bond Zero Duration Fund (HYZD)

The fund seeks to provide current income by taking a long position primarily in a diversified portfolio of below investment-grade high-yield debt securities. Though capital appreciation is its secondary motive, it has managed to become one of the top performers this year, gaining 4.1% YTD (see all High-Yield/Junk Bond ETFs here).

The product thrives on long-short strategies. The fund takes short positions in US Treasuries corresponding to duration matching the duration of long portfolio, with total duration of nearly zero years. This way, the fund alleviates rising interest rate risks too.

Net effective duration (considering the short positions) is negative 0.24 years indicating no interest rate risks currently. The fund is meant for an intermediate term as evident from 3.58 years of weighted-average maturity.

The product charges 43 bps in fees, has amassed about $14.4 million and trades at a paltry volume of about 10,000 shares a day which ensures extra cost for the product in the form of a wide bid/ask spread. The fund yields 3.80% (as of April 6, 2015).

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SPDR-BC CONV SC (CWB): ETF Research Reports
MKT-VEC CEF MUN (XMPT): ETF Research Reports
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