Friday, May 25, 2012

Bonds and more

Most long term investors do better if they have some allocation to fixed income. Even 10% can mean a signficant difference if there is a stock market crash. An 80% stock/20% bond portfolio tends to do near as well as 100% in stocks with a much smoother ride, fewer down years, and more importantly fewer big down years. Many favor the cliche asset allocation of age in bonds (eg: age 25, 25% in bonds, age 40, 40% in bonds and so on).

ETF money flows show a lot of money flowing into fixed income. This is a brief survey of some choices. (link) is a good resource for payment dates, the most recent dividends, and the current yield for stocks and ETFs.

Correlation tracker (link2) is another useful tool for those looking for diversification. To use the correlation tracker enter two different symbols, for example TLT and SPY gives a correlation of -0.08, which is low. If I enter IWM and SPY, it gives a correlation of 0.93 which is high, so market movements in one will tend to echo in the other.

Starting at some of the least risky choices are short term bond ETFs such as BSV or SCHO. There are total bond market ETFs such as BND, SCHZ, LQD, especially appropriate for those that like to keep their investments simple.

There are high yield choices such as HYG and JNK. Vanguard recently closed one of their high yield mutual funds to new investors. This sometimes is an indicator that a sector is getting too popular.

For Treasuries, readers know I like to trade the options on TLT, and its double inverse TBT. For those that like to trade, there is also EDV which is a zero coupon bond ETF. EDV doesn't pay dividends and is extremely sensitive to changes in interest rates. There are leveraged ETFs, but watch the bid/ask spreads, the decay, the volume.

On the stock side, some popular dividend ETFs include VIG, SCHD. XLU is a utility ETF. PFF is a preferred stock ETF. Of course, a person could also select one or more of the many individual stocks that have a decent yield.

There are also municipal bonds for those that are in high tax brackets. More recent choices include Build American Bonds (BAB is one ETF), and Emerging Market bonds (PCY, EMB). There are also high yielding limited partnerships and REITs (IYR).

As always, standard disclaimers apply. Nothing I write on this blog is a recommendation to buy or to sell. A person needs to do their due diligence before investing money. Expense ratios, liquidity in terms of typical bid/ask spreads, daily volume of shares, yield, average duration, are all factors to consider.

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