"Start by putting one-fourth of your bond portfolio in an ETF that invests in short-term corporate bonds. Our choice is iShares Barclays 1-3 Year Credit Bond (CSJ). If you expect interest rates to rise, you want to keep maturities short because short-term bonds lose less than long-term IOUs when yields jump (bond prices move inversely with rates). Corporates get the nod over Treasuries because they pay more. This ETF yields 2.0%, but if rates rise, the fund’s yield will keep pace quickly.
Next, put another 25% into some fixed-income securities of the foreign sort. This move is a hedge against a falling dollar. Try SPDR Barclays Capital International Treasury Bond (BWX), which invests in the equivalent of Treasury bonds from developed nations such as France, Germany and Japan. It yields 2.4%.
Now, to boost the portfolio’s cash payout, allot 20% to high-yield, or “junk,” corporate bonds. Junk bonds can lose substantial value when their issuers fall on hard times. But a growing economy should hold down defaults, and your short-term corporate ETF, which holds no junk, balances the risk. We like iShares iBoxx $ High-Yield Corporate Bond (HYG). The ETF, which holds bonds from such firms as NRG Energy and EchoStar, yields 8.2%.
Round out the package by assigning 15% to an ETF of short-term Treasuries and another 15% to one that owns inflation-indexed bonds. For the first, iShares Barclays 1-3 Year treasury bond (SHY) is a good choice. It yields a paltry 0.8%, but it has mirrored its index nearly perfectly since its inception in 2002. The popular iShares Barclays TIPS (TIP) holds Treasury inflation-protected securities with both short and long maturities. The TIPS fund also yields a miserly 0.8%, but the bonds it holds adjust their principal value to keep pace with increases in the consumer price index."
Read the complete article here:
www.kiplinger.com/magazine/archives/mix-it-up-with-etfs.html
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