I am retired and take educated guesses on all things financial.

January 25, 2007

January 26, 2007: Bonds and the ETF mimic

United States WW2 War Bond poster by Dr. Seuss, Bonds galore!, Bonds, and a Russian WW1 War Bond poster produced by a victim of a subsequent Bolshevik purge, no doubt.

When the stock market begins to stagger, or when astute investors strive to achieve a diversified portfolio of securities and other investments, Bonds begin to receive attention.

Aggressive investors have held a fascination with low quality Bonds. The past few years, they have been well rewarded for their prowess. Now that the spreads between most junk and investment grade quality Bonds have narrowed, what are these investors going to do? For some, it may mean disbursing more assets into high yield funds, convertible securities, preferred shares or emerging market debt. For others, it may mean to forget high yield, such as it is, and go into purely investment grade securities or their equivalent.For those seeking ETF funds that will allow investors to hybrid into more creative bundles of yield quality, disappointment awaits.

I have been unimpressed with the ETF Bond fund roll outs recently. When there was no winner or even minimal competition between creative investments, the term "like kissing your sister" used to be expressed. Go through the motions with no rewards or excitement. No winner. No looser. The present state of Bond ETFs personified.

ETF fund companies such as WisdomTree have dividend dynamics, but no real income punch. Lots of sectors and indexes, but no unique hybrids. IShares launched several Bond ETFs last week. Yawn. Things are so boring that Vanguard, launching four ETF Bond funds, looks mighty sexy with ultra-low cost and a larger Bond portfolios to keep things, well, tasting of vanilla.

Certainly, Bonds are not meant to be sexy, but how about mixing the quality and yield? Give us some ETFs that will accentuate the punch of high yield securities with a mix of the eclectic? Is this asking too much? Or, is this just asking for trouble?

For the investor frustrated by the sameness of Bond funds in their respective classes, perhaps the best route is to seek some blend with, say, the Fidelity Strategic Income Fund, GE Interest Plus account,short-term GMAC Smart Notes, a Canadian Oil Trust like Canetic Resources (CNE), the Nicholas-Appelgate Convertible and Income Fund II (NCZ), Aon Corp. 8% Corts Pfd (KVW) and the Advent Claymore Convertible and Income Fund (AVK).The Claymore Dividend Hog ETF Fund (CVY) or wisely selected WisdomTree ETFs may provide growth.

Blending disparate income-producing investments with a wide band of risk is not all that difficult for the individual investor with time and tools. Are those in ETF-land missing an opportunity by not producing more products that would mimic these efforts?

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