Right now bonds are expensive, as they are trading at premium with low yields. Bonds are also very complex instruments. So for most people buying bonds directly in a record-low interest rate environment means you are overpaying for the bond, with a reduced yield below the coupon rate. However loading up a portfolio with 80% or 90% dividend yielding stocks is not prudent either. We only have to look back at the market crash of 2008 to see how equities did – but bonds and bond funds did well. Bonds are a necessary component of any portfolio, since they create both income and safety in all investment climates.
In my previous post Buying Bonds? Think Short Term, I discussed the merits of holding short-term bond funds or ETF’s, as opposed to corporate or long-term bond funds. The reason being that corporate and long-term bonds are more sensitive to interest rate changes. For the short-term bond component of a fixed-income section in your portfolio, I especially like the Claymore 1-5 Year Govt. Laddered Bond ETF (CLF on the TSE).
Claymore 1-5 Year Govt. Laddered Bond ETF (CLF) represents a good short-term bond fund holding. It is designed to track the DEX 1-5 year Laddered Government Bond Index™. It has an exceptionally low Management Expense Ratio (MER) of only 0.16%. The top ten holdings are all above 4% yield. The ETF currently has an indicated distribution yield of 4.09% which is actually higher than many other bond mutual funds, and pays monthly interest income.
In addition as the 5 year laddered bonds expire, they will likely be replaced with higher yield bonds – since interest rates are expected to increase over the next year. And you will also get any appreciation in share price. For the current year the ETF was trading at a low of 20.01 and currently trades at 20.60, a 2.95% increase in share price. So for the year your total return on the CLF would have been 2.95% + 4.09% yield = 7.04%. That is an exceptional return for a conservative bond investment! I’ve been watching this ETF for a few weeks now, and it seems to be on the rise, but future performance of course is no guarantee.
For more info, visit the Claymore CLF web page:
Keep in mind, ETF’s like stocks have a trading fee. So if you are paying a $29 trade fee for example, you will want to be purchasing at least 3K of investment to keep it at a 1% or less commission.
This is the part of the website where I tell you I am not a financial advisor (thank goodness) or an investment dealer (LOL). This website does not offer professional or financial advice, only my personal rants and opinions (hope you enjoy them). I’m also supposed to tell you to consult with a “professional” financial advisor before making any investment decisions. Be prudent and cautious. Do your own research, and only invest in what you understand!