With U.S. interest rates showing no sign of rising in the face of persistent economic weakness, how can investors find higher yields without taking on inordinate risk? Two possible approaches are funds that cast a wider net in terms of bond sectors and those that do the same thing with dividend-paying stocks.
S&P Capital IQ analyst Todd Rosenbluth recommends two actively managed mutual funds — Janus Flexible Bond Fund (JAFIX), from Janus Capital Management and the Core Fixed-Income Fund (TGCFX) from TCW Investment Management Company — and two bond index-based ETFs — Vanguard Total Bond Market ETF (BND) and iShares Barclays Aggregate Bond (AGG) — that invest in a mix of bond sectors. All four produce higher yields than their peers without taking on excessive risk, says Rosenbluth.
JAFIX currently holds more than 50 percent of its assets in investment-grade U.S. corporate bonds, with most of the rest in U.S. Treasuries, agency mortgage-backed security (MBS) pass-throughs and a smattering of nonagency and commercial and residential MBSs. JAFIX produced an annual average return over the three years ending August 29 of 7.9 percent, before expenses of 0.7 percent.
TGCFX has basically the same strategy with much less exposure to corporate bonds, a little less in U.S. Treasuries and significantly more in agency MBS pass-through bonds and cash. It had an average annual three-year return of 8.48 percent before expenses of .44 percent.
As for Rosenbluth’s ETF picks, Vanguard’s BND had a 6.4 percent return for the same period, before a super-low expense ratio of 0.1 percent. The iShares AGG compares at a return of 6.2 percent for the period before a similarly low expense ratio of 0.2 percent. However, the active funds’ expenses don’t reduce the gains over the ETFs by all that much. The actively managed TGCFX fund investor would have gotten as much as 200 basis points of outperformance for an extra 20 or 30 basis points of extra cost. Still, notes Rosenbluth, ETFs “are the low-cost way to get exposure to various bond sectors.”
The analyst concedes that all four funds are riskier than those exposed only to U.S. Treasury securities, but notes that “we think they balance out the risk-reward well.”
Another alternative for the income-oriented are ETFs that invest in high-dividend equities based in countries outside the U.S., wrote Carolyn Pairitz on Wednesday in a post on the website, ETF Database.
Pairitz identifies 20 such ETFs that focus on emerging markets, the Pacific Rim and Europe or a combination thereof and notes they enable investors to “beef up their portfolio’s current income while at the same time improving overall geographic diversification.”
