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Bond Fund ETFs Yield Highest Ratings

Stocks in this article: ITE PLW THL

Although bond funds make up only about 6% of the 802 exchange-traded funds tracked by Ratings, they dominate the list of those with the highest ratings.

Nine of the 10 ETFs on the accompanying table, which represents those with the best marks from Ratings, invest in bonds. Each can boast of the highest possible grade of A-plus, which equates with a "buy" recommendation.

The only non-bond fund on the list, the PowerShares DB U.S. Dollar Bullish Fund (UUP), earned an A-plus by riding the recovery of the U.S. dollar. Only a few months ago, with the buck tanking relative to the euro and major Asian currencies, anyone predicting the greenback would re-emerge as a dominant world currency would likely have been labeled a wild optimist.

While ETFs have been around since February 1993, the first bond ETF didn't debut until 2002. Until July 2007, only two ETFs focused their holdings in the bond market. Currently, only 49 bond ETFs are tracked by Ratings.

With the stock market in tatters and the economy in recession, a flight to conservatism is reflected in the fact that six of the nine bond funds in the table make clear in their names that they invest in Treasury issues.

The trend toward safety is further underscored by the dominance of shorter maturities on the fixed-income funds in the table. Three note specifically that they invest in short-term bonds, while two others typically buy intermediate-term Treasuries.

The downside of super-safe Treasuries, especially those with short and intermediate maturities, is that the trade-off for security is diminished yield. The highest yield of the funds in the table is held by the iShares Lehman MBS Fixed-Rate Bond Fund (MBB), which invests in the dicey mortgage-backed bond market. The relatively volatile fund was recently yielding 5.9%.

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