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 to choose from where 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. And, 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 ten below by AUM (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% to 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.

 

LQD (iShares iBoxx Investment Grade Bond ETF) tracks the iBoxx Liquid Investment Grade Index comprising over 600 bond issues. The fund was launched in July 2002. AUM (Assets under Management) is $13 billion and daily trading volume averages just under 1M shares. Over 70% of constituent holdings have maturities between 3-10 years. This would be considered moderate and offers less duration risk.

As of mid-September 2011, the annual dividend is $.43 making the current yield 1.53% with YTD 4.05%.

Beware that over 50% of holdings are in the financial sector dominated by banks including those in Europe.

Data as of September 2011

Top Ten Holdings & Weightings
  1. AT&T 5.5%:  0.84%
  2. Wells Fargo & Co 5.625%: 0.79%
  3. Wal-Mart Stores 6.5%: 0.73%
  4. AT&T 6.55%: 0.71%
  5. JP Morgan Chase 6.3%: 0.71%
  6. Amer Intl Group Inc  5.85%: 0.69%
  7. Verizon  8.75%: 0.68%
  8. Citigroup 8.5%: 0.68%
  9. General Electric Cap Corp 5.625%: 0.68%
  10. Credit Suisse New York Branch 5.3%: 0.66%

 

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