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Top 10 Corporate Bond ETFs: Pros vs. Cons

NEW YORK (TheStreet) -- In an era of low interest rates, and perhaps a good deal of distrust of equity markets, investing for income has become quite a challenge. There are many ETF sectors in which yield is a prime consideration. With fixed income and bonds, the menu consists of the following: corporate, high yield, municipal, emerging market, government, international government, inflation-protected, mortgage-backed and preferred stock.

Many institutional investors (insurance companies and large pension plans) must have an allocation to bonds. Many asset allocation plans include bonds for individual investors. Clearly, savers and seniors especially gravitate to them for safety and income.

We'll be evaluating most of these issues and sectors beginning with corporate bonds. While we haven't included all that are available, we've sorted the top 10 below by AUM, or assets under management. It doesn't mean we favor one over another and perhaps newer issues might even have better features, but haven't been seasoned enough to garner significant assets yet.

Corporate bond yields range from 2%-4% overall. Investors should remember most corporate bond issues have call dates, which would mandate early redemption at the option of the issuer. These can limit capital appreciation.

Corporate bond supply is quite plentiful, given low yields. This has made it compelling for companies to take advantage low-cost funding for many purposes, including stock buy-backs and rebuilding balance sheets.

Typically, most bond issues and sectors aren't highly correlated to stocks. This was especially true during the previous bear market. However, recently, given unusual Fed policies combining ZIRP (zero interest rate policies) with QE (quantitative easing), these non-correlations have become less apparent. This may prove temporary.

As a former bond principal, I'm really not in favor of bonds now. Yields are skimpy and risks from budding inflation is high with longer maturities. With shorter maturities, you do little better than yields from the bank after headline inflation. More on that later.


10. iShares iBoxx Investment Grade Bond ETF (LQD) tracks the iBoxx Liquid Investment Grade Index comprising over 600 bond issues. AUM is $13 billion and daily trading volume averages just under 1 million shares. More than 70% of constituent holdings have maturities between 3 and 10 years. This would be considered moderate and offers less duration risk.

The current yield for LQD is 4.74%. The year-to-date market return through May 2011 has been less than 3%.

LQD Top Ten Holdings

  1. AT&T 5.5%: 0.95%
  2. Wells Fargo & Co New York 5.625%: 0.91%
  3. JP Morgan Chase 6.3%: 0.85%
  4. American International Group 5.85%: 0.82%
  5. JP Morgan Chase 4.65%: 0.82%
  6. Citigroup 8.5%: 0.80%
  7. Wal-Mart Stores 6.5%: 0.79%
  8. General Electric Capital 5.625%: 0.78%
  9. Credit Suisse New York 5.3%: 0.75%
  10. Verizon Communications 8.75%: 0.75%

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