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I write a ton of words every week on the topic of building income portfolios using exchange-traded funds. Some articles are purely an exercise in research and education, while others are directed towards real-world concepts that we are implementing for clients of our firm .
It’s through this process that I often dive into a new fund or sector and compare it to an established group of peers. It’s also refreshing to see funds that I have reviewed favorably in the past live up to (or exceed) their lofty expectations.
In both instances, I am drawn to funds that set themselves apart through a dynamic index strategy, low cost structure, or unique value-add. Anyone can go buy the iShares Investment Grade Corporate Bond ETF (NYSEARCA: LQD ) or the Vanguard Total Bond Market ETF (NYSEARCA: BND ). Those are the bland, boring benchmarks. What interests me is finding tools to replace or supplement those vehicles to create a well-rounded income portfolio with market-beating potential.
Below are a few off-the-beaten-track bond ETFs with world-class qualities.
VanEck Vectors Fallen Angel High Yield Bond ETF (ANGL)
If you are looking for a high yield bond fund to round out the credit side of your portfolio, VanEck Vectors Fallen Angel High Yield Bond ETF (NYSEARCA: ANGL ) may be one to consider. This index of 234 domestic fixed-income securities sets itself apart by owning credits rated below-investment grade in today’s market that were considered investment grade at the time of issuance.
The “fallen angels” moniker is quite appropriate in this instance because these once highly touted corporate bonds have slipped down the credit rating ladder.
ANGL has $912 million in total assets, a 30-day SEC yield of 4.95%, and charges a net expense ratio of 0.35%. For the sake of comparison, the mega iShares iBoxx $ High Yield Corporate Bond ETF (NYSEARCA: HYG ) carries an expense ratio of 0.49% and sports a similar yield.
The ANGL portfolio has also bested HYG significantly on three and five-year time frames. This ETF has gained +26.16% and +44.39% in total return (dividends and capital appreciation) over those periods. That contrasts sharply with the +9.45% and +26.99% gains of HYG during that span.
This type of position may ultimately work to complement a more traditional, diversified core bond fund or even be used in a tactical framework to target a specific sector.
PIMCO Enhanced Short Maturity Active ETF (MINT)
Some bond investors want to be ultra-conservative with their money and PIMCO Enhanced Short Maturity Active ETF (NYSEARCA: MINT ) can help them get there. This fund debuted as one of the first PIMCO exchange-traded funds and has amassed quite a track record and following.
The underlying portfolio is primarily composed of short and ultra-short duration bonds of investment grade companies and mortgage securities. MINT has $7.3 billion in total assets, a 30-day SEC yield of 1.55%, and charges an expense ratio of 0.36%. Because this fund is active, its portfolio managers can modify the underlying holdings to the current market and adjust duration or sector exposure as appropriate.
People often make the mistake of classifying funds like MINT as “money market alternatives”. Don’t be one of those people. Even in this type of fund there is a modest amount of credit and interest rate risk that must be understood before you invest. It can certainly go down in value under the right circumstances.
Nevertheless, this ETF has put up some impressive numbers for its category over the last several years. It’s handily beaten rivals such as the iShares Short Maturity Bond ETF (BATS: NEAR ) and First Trust Enhanced Short Maturity ETF (NASDAQ: FTSM ) over a 3-year time frame. MINT has also had much less realized volatility and a similar total return profile when compared against short-term target duration index funds that are popular among income enthusiasts.
SPDR Barclays Capital Convertible Securities ETF (CWB)
I gave this last one a lot of thought after sifting through virtually every sector of the bond market. There are some great active funds out there and some worthy ultra-low-cost passive index funds. But none of them screams dynamic or interesting in the sense that SPDR Barclays Capital Convertible Securities ETF (NYSEARCA: CWB ) does.
This relatively under-the-radar bond fund has quietly amassed over $4 billion in assets and built an impressive track record that few have been able to match. CWB owns just under 100 convertible securities that can be exchanged at the option of the holder for common or preferred stock.
This ETF has a key criterion in its portfolio construction methodology that ensures its holdings have issue sizes greater than $500 million. It also rebalances the holdings monthly to stay in lock-step with the underlying index.
Some of the current statistics of this fund are a 30-day SEC yield of 2.44% and an expense ratio of 0.40%. It’s also managed to post an impressive 3-year track record of +21% and a 5-year total return of +70%. An accommodating and liquid credit market combined with a thirst for risk assets has been key to the strength of this fund over that time frame.
CWB would be most appropriate as a complimentary position in any diversified income portfolio and will offer varying risk dynamics than traditional bond funds.
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