In a world where CDs can yield up to 7%, you might wonder why to bother with bond ETFs. The truth is you can find bond ETFs yielding even more than that.
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Thirteen actively traded bond ETFs, including Virtus InfraCap US Preferred Stock ETF (PFFA), Invesco Global Short Term High Yield ETF (PGHY) and SPDR Blackstone Senior Loan ETF (SRLN), all sport SEC yields of more than 8%, says an Investor's Business Daily analysis of data from Morningstar Direct.
Sure, they all carry more risk than a CD does. But some investors might think the added yield more than compensates them. "Investors have been willing to take on more risk either through duration or credit risk," said Todd Rosenbluth of Vetta Fi.
Money Pours Into Bond ETFs
Investors keep piling cash into bond ETFs, even though boring old CDs are paying so well.
Bond ETFs hauled in $117 billion in new money this year, including $17 billion just in the month of July, Rosenbluth says. "Fixed income ETFs have been very popular with investors in 2023," he said.
Part of investors' interest in bond ETFs is the fact that most CDs people actually buy are still yielding less than 7%. Among most mainstream offerings, CD yields are topping out at 5.6%, Bankrate says. That's not all that much better than the 4.2% SEC yield on the iShares Core US Aggregate Bond ETF (AGG).
AGG is one of the most popular among the broad market index ETFs, Rosenbluth says. That ETF alone hauled in $2.4 billion. ETFs like this "form the core for many taxable and tax-exempt based client portfolios," he said.
Many investors, though, think the Federal Reserve may cut interest rates by next year. And so, many are locking in today's higher long-term rates now for a longer time in the future. The iShares 20+Year Treasury Bond ETF (TLT) was the industry's most popular fixed income ETF so far this year, adding $4.7 billion, Rosenbluth says. The ETF's duration is much longer than the broad market's roughly 6.5 years. That means investors who buy it now lock in today's rates for a longer period of time.
Finding Super-Size Bond ETF Yields
If you're just looking for big yields, the leader is Virtus InfraCap Preferred Stock. The $606 million-in-assets bond ETF sports a head-turning SEC yield of 10.4%.
The ETF distinguishes itself by investing in preferred stock, which is kind of a hybrid of stock and bonds. Companies that issue preferred stock typically pay higher yields on the shares than on their regular common stock. But unlike bonds that must be paid on time, companies may halt their preferred stock payouts. The ETF owns more than 200 different preferred stocks to help control risk of any one issuer struggling to pay. Just watch the fees on this ETF. It charges a high annual fee of 1.4%.
Another high-yield bond ETF champion is Invesco Global Short Term High Yield Bond ETF. The $166-million-in-assets ETF takes a more traditional approach to hit its 9.7% SEC yield. It keeps costs to investors low with an annual fee of 0.35%.
This ETF focuses primarily on riskier BB and B rated bonds from issuers around the world. Additionally, 13.3% of its bonds are rated lower than B. Nearly 80% of its holdings are corporate bonds, including those issued by overseas car sellers.
Above all, investors are finding how fixed income plays a role in their portfolios when there's more competition. "Using ETFs, advisors are able to maintain their exposure to fixed income by rotating to take on additional risk in an attempt to generate additional total return," Rosenbluth said.
Highest Yielding Actively Traded Bond ETFs
| Name | Ticker | Net assets ($ billions) | SEC Yield |
|---|
| Virtus InfraCap US Preferred Stock | (PFFA) | $0.6 | 10.36% |
| Invesco Global Short Term Hi Yld Bd | (PGHY) | 0.2 | 9.65 |
| SPDR Blackstone Senior Loan | (SRLN) | 4.5 | 9.54 |
| JPMorgan BetaBuilders $ HY Corp Bnd | (BBHY) | 0.4 | 8.59 |
| VanEck EM High Yield Bond | (HYEM) | 0.4 | 8.56 |
| First Trust Senior Loan | (FTSL) | 2.1 | 8.40 |
| SPDR® Portfolio High Yield Bond | (SPHY) | 1.7 | 8.40 |
| iShares Broad USD High Yield Corp Bd | (USHY) | 9.3 | 8.39 |
| Invesco Senior Loan | (BKLN) | 4.0 | 8.33 |
| BNY Mellon High Yield Beta | (BKHY) | 0.1 | 8.32 |
| SPDR® Blmbg ST HY Bd | (SJNK) | 3.8 | 8.25 |
| SPDR® Blmbg High Yield Bd | (JNK) | 8.6 | 8.10 |
| iShares 0-5 Year High Yield Corp Bd | (SHYG) | 5.4 | 8.06 |
Sources: Morningstar Direct, IBD, based on SEC yields
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FAQs
Another advantage of bonds is that they usually offer higher interest rates than CDs. However, the reason for that is the key drawbacks of bonds. CDs are insured by the FDIC but bonds have no such protection. It's possible for the bond issuer to default, which would cause you to lose your investment.
Are bond funds a good investment? ›
The key benefits to owning bond funds are: Greater diversification per dollar invested: It is much easier to achieve a diversified bond portfolio per dollar invested using a fund, because you obtain exposure to a basket of bonds within the fund.
Are I bonds better than CDs? ›
If you're stashing cash for just a few years, locking in one of today's historically high CD rates is the better bet. But for long-haul savings, I bonds can ensure your cash is always safely out-earning inflation.
Which is better CD or Treasury bond? ›
6-month & 1-year T-Bill Yields since June 2022
CD rates have also skyrocketed. Although they offer, on average, a lower yield than Treasurys. As of January 2024, the national deposit rate for 12-month and 60-month CDs was 1.86% and 1.41%, respectively. “The 1-year Treasury yield is 4.80%.
Should I get out of my bond fund? ›
Though holding bonds until maturity can be moderately lucrative, you might be able to generate bigger gains by selling when their market value is high, especially if you've held the bond for several years and have benefited from its coupon payments.
Who is paying the highest interest on CDs? ›
Best 1-Year CD Rates
- Northpointe Bank – 5.30% APY.
- West Town Bank & Trust – 5.30% APY.
- Prime Alliance Bank – 5.25% APY.
- American 1 Credit Union – 5.25% APY.
- Mountain America Credit Union – 5.25% APY.
- KS State Bank – 5.25% APY.
- Bask Bank – 5.25% APY.
- Merchants Bank of Indiana – 5.25% APY.
The disadvantages of bond funds include higher management fees, the uncertainty created with tax bills, and exposure to interest rate changes.
What is the best bond fund to buy now? ›
9 of the Best Bond ETFs to Buy Now
| ETF | Expense ratio | Yield to maturity |
|---|
| Vanguard Total Bond Market ETF (BND) | 0.03% | 5.0% |
| Schwab Short-Term U.S. Treasury ETF (SCHO) | 0.03% | 4.8% |
| Schwab Intermediate-Term U.S. Treasury ETF (SCHR) | 0.03% | 4.4% |
| Schwab Long-Term U.S. Treasury ETF (SCHQ) | 0.03% | 4.6% |
5 more rowsYes, you can lose money investing in bonds if the bond issuer defaults on the loan or if you sell the bond for less than you bought it for. Are bonds safe if the market crashes? Even if the stock market crashes, you aren't likely to see your bond investments take large hits.
Why should you put $15000 into a 1 year CD now? ›
In summary, a certificate of deposit gives you steady and safe returns. Investing $15,000 in a CD could lead to substantial gains, regardless of the CD's length. However, make sure you won't need that money while the CD is active because withdrawing early usually incurs hefty penalties.
Potential for Increased Value. As investors seek safer assets during a recession, the demand for bonds typically increases. This increased demand can drive up the price of existing bonds, especially those with higher interest rates compared to new bonds being issued.
Will bonds do well in 2024? ›
Investment-grade corporate bonds remain attractive given their lower risk and relatively high yields. Long-term investors who can handle volatility might consider high-yield bonds and preferred securities, but we wouldn't suggest large positions in either.
Why buy a bond instead of a CD? ›
After weighing your timeline, tolerance to risk and goals, you'll likely know whether CDs or bonds are right for you. CDs are usually best for investors looking for a safe, shorter-term investment. Bonds are typically longer, higher-risk investments that deliver greater returns and a predictable income.
Are CDs safe if the government defaults? ›
No investment is 100% safe from a default, not even certificates of deposit.
Do you have to pay taxes on a CD when it matures? ›
Key takeaways. Interest earned on CDs is considered taxable income by the IRS, regardless of whether the money is received in cash or reinvested. Interest earned on CDs with terms longer than one year must be reported and taxed every year, even if the CD cannot be cashed in until maturity.
Why are CDs yielding more than Treasuries? ›
A higher rate set by the Federal Reserve means lower returns on T-bills. By contrast, CDs and high-yield savings accounts tend to give higher returns as the Federal Reserve benchmark rate increases.
What advantage do CDs have over corporate bonds? ›
CDs are covered by FDIC insurance1 up to applicable limits, while corporate bonds are not insured by the FDIC, are not deposits, and may lose value. This means the risk of failing to make timely interest and principal payments (known as the default risk) is generally lower for CDs than for most corporate bonds.
Which pays more a CD or money market? ›
CDs typically offer higher interest rates compared to regular savings or money market accounts. Generally, the longer a CD's term, the more interest it pays, helping offset the loss of liquidity.
