Low Fee Bond ETFs Are Where It's At

With stocks having rebounded off their February lows, the statistic about six of this year's top 10 asset-gathering exchange traded funds being fixed income ETFs is longer accurate. That number has been pared to three, but that does not mean advisors and investors are not thirsty for bonds.

Arguably, the case for bond ETFs is growing stronger as Treasury yields cascade lower, bring the dollar along for the ride and while the Federal Reserve puts off raising interest rates. However, some market observers believe returns for various bond funds will be muted going forward. That means investors should pay close attention to the fees they pay to be involved with bond ETFs because as positive returns become harder to generate, management fees loom large.

“In 2009, the average fund in the S&P Global Market Intelligence taxable bond fund category generated 19.7%, a return more typical of what investors have hoped for from a riskier equity fund. In the subsequent three years, the average bond fund rose between 4.6% (in 2011) and 8.5% (2010), quite respectable for strategies where capital preservation is a focus. However, in the three calendar years since, the average fund lost money twice (2013 and 2015) and gained 3.0% (2014) less than in the recent past,” said S&P Capital IQ in a note out Wednesday. 

The iShares Core U.S. Aggregate Bond ETF AGG is a prime example of a low-fee bond ETF. AGG charges just 0.08 percent per year, or $8 for every $10,000 invested. That low fee is probably one reason why the $36.4 billion AGG has added $4.96 billion in new assets this year, a total surpassed by just one other ETF.

AGG is one of the least expensive bond ETFs and far cheaper than many rival mutual funds. Investors betting on bond funds “would be wise to pay less than the 79 basis points the average core bond mutual fund charges. The 70 basis point differential will more noticeable when returns are modest,” notes S&P Capital IQ.

Investors willing to pay a bit more, but still less than the aforementioned 0.79 percent a year, can get the benefit of all-star active bond management. For example, the SPDR DoubleLine Total Return Tactical ETF TOTL charges 0.55 percent per year.

TOTL, Jeff Gundlach's first entry into the ETF space, debuted in February 2015 and already has $2.35 billion in assets under management, making it one of the fastest-growing active and fixed income ETFs on the market today.

Two-thirds of TOTL's weight is currently allocated to mortgage-backed securities and emerging markets bonds.