3 Must-Buy Intermediate-Term Bond ETFs While the inflation has steadily cooled over the past year, getting it down to the Fed’s target rate will be the toughest mile, risking holding rates steady next month. Given...
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While the inflation has steadily cooled over the past year, getting it down to the Fed’s target rate will be the toughest mile, risking holding rates steady next month. Given this backdrop, it could be wise to buy best intermediate-term bond ETFs First Trust Low Duration (LMBS), iShares Core 1-5 Year (ISTB), and iShares Intermediate Government/Credit (GVI) for greater diversification and steady income. Read more….
The July CPI report shows inflation edges higher, interrupting a year-long steak of waning price increases. Although prices have steadily eased over the past year, the Fed officials still seem divided on whether to raise interest rates in September or hold them steady.
Amid an uncertain macroeconomic backdrop, best-performing intermediate-term bond ETFs First Trust Low Duration Opportunities ETF (LMBS), iShares Core 1-5 Year USD Bond ETF (ISTB), and iShares Intermediate Government/Credit Bond ETF (GVI) could be ideal additions to your portfolio for instant diversification and stable returns.
The consumer price index (CPI) increased 3.2% year-over-year in July. Prices rose a seasonally adjusted 0.2% for the month, in line with the Dow Jones estimate. But the annual rate was slightly below the 3.3% estimate though higher than in June, resulting in the first increase in more than a year. Also, the core CPI maintained a 12-month rate of 4.7%.
Over the past year, inflation in the U.S. has dropped from nearly 9% to 3.2%, softening most of the price pressures that have gripped the country for more than two years. While inflation has come well off its 40-year highs of mid-2022, it is still well above the Fed’s 2% target.
Fed officials are divided on whether to raise interest rates next month for the 12th time to cool the economy or hold them steady. Fed governor Michelle Bowman said last week at an event in Atlanta that additional increases would be likely needed to lower inflation to the FOMC’s goal.
On the other hand, Philadelphia Fed President Patrick Harker said, “I believe we may be at the point where we can be patient and hold rates steady.” Further, while Carol Schleif, chief investment officer at BMO Family Office, expects the central bank to hold rates steady in September, the job market’s strength could still give the Fed “ample room” to hike again.
Indeed, the officials unanimously voted to increase rates by 25 basis points to a range of 5.25%-5-5%, the highest level in more than two decades. And Fed Chair Jerome Powell maintained a hawkish tone on fighting inflation in his post-meeting news conference, leaving the door open to another rate hike.
Given the persistent inflation and the possibility of further rate hikes, investors could consider taking refuge in bond ETFs with short-term, intermediate-term, or long-term maturity ranges. These fixed-income ETFs provide instant diversification, both across your portfolio and within the bond portion of your portfolio.
Moreover, most bond ETFs pay dividends monthly, giving investors regular income in a short timeframe.
Against this backdrop, investing in quality intermediate-term bond ETFs that ensure enhanced diversification and steady income seems wise.
Let’s take a closer look at the fundamentals of these ETFs:
First Trust Low Duration Opportunities ETF (LMBS)
LMBS is an actively managed mortgage-backed securities (MBS) ETF with a duration target and reaches beyond agency-backed MBS to include non-agency and commercial MBS for relative value and yield. The fund primarily seeks to generate current income with a secondary objective of capital appreciation.
LMBS has assets under management (AUM) of $4.28 billion. The fund’s top holdings include UMBS TBA 30yr 5.5%, due April 1, 2053, with a 4.11% weighting, UMBS TBA 30yr 5%, due April 1, 2053, at 3.25%, and UMBS TBA 30yr 4%, due July 1, 2053, and FNMA 30yr Pool#FM3003 4%, due May 1, 2049, with 1.94% and 1.91% weightings, respectively.
The fund’s expense ratio of 0.66% compares with the category average of 0.30%. Its net inflows came in at $3.22 billion over the past five years. Also, the ETF has a beta of 0.05.
In July, LMBS declared a monthly dividend of $0.15 per share, an 11.1% increase from the previous dividend of $0.14. The dividend was paid on July 31 to shareholders as of record July 24. The fund’s annual dividend of $1.80 yields 3.79% on the current share price. Its four-year average yield is 2.29%. Its dividend payouts have increased at a CAGR of 45.3% over the past three years.
The fund has gained nearly 1% over the past nine months to close the last trading session at $47.54. It has a NAV of $47.61 as of August 11, 2023.
LMBS’ POWR Ratings reflect this promising outlook. The fund’s overall A rating equates to a Strong Buy in our proprietary rating system. The POWR Ratings are calculated by considering 118 different factors, with each factor weighted to an optimal degree.
LMBS has an A grade for Trade and Buy & Hold and a B for Peer. In the 50-ETF B-rated Intermediate-Term Bond ETFs group, it is ranked first.
To access all LMBS’ POWR Ratings, click here.
iShares Core 1-5 Year USD Bond ETF (ISTB)
ISTB provides exposure to short-term U.S. dollar-denominated bonds that are rated either investment grade or high yield with remaining maturities between one and five years. This fund covers a broad spectrum of U.S. dollar-denominated fixed-income instruments, including US Treasurys, government-related issues, MBS, CMBS, Eurodollar bonds, and high-yield corporate bonds.
ISTB tracks the performance of the Bloomberg US Universal 1-5 Year Index. With $4.17 billion in AUM, ISTB’s top holdings include US Treasury Notes at 0.875%, due September 30, 2026, with a 1.37% weighting, US Treasury Notes at 1.25%, due November 30, 2026, at 1.37%, and followed by US Treasury Notes 4%, due February 29, 2028, with a 1.03% weighting.
ISTB currently has 5500 holdings in total. Over the past three years, the fund’s inflows were $485.41 million and $2.48 billion over the past five years. In addition, its 0.06% expense ratio compares to the 0.41% category average. Its annual dividend of $1.22 translates to a 2.62% yield on the current share price. The fund’s four-year average yield is 2.17%.
The fund has gained marginally over the past month to close the last trading session at $46.55. Also, it has a beta of 0.07. The ETF’s NAV was $46.52 as of August 11, 2023.
ISTB’s fundamental strength is reflected in its POWR Ratings. The ETF has an overall rating of A, translating to a Strong Buy in our proprietary rating system.
ISTB has a grade A for Trade and Buy & Hold. It also has a B grade for Peer. It is ranked #2 out of 50 ETFs in the B-rated Intermediate-Term Bond ETFs group.
Click here to access all the ISTB ratings.
iShares Intermediate Government/Credit Bond ETF (GVI)
GVI seeks to track the investment results of an index composed of U.S. dollar-denominated government, government-related, and investment-grade corporate bonds with remaining maturities between one and ten years. Its broad-based exposure to investment-grade U.S. bonds makes GVI a building block for any investor constructing a balanced long-term portfolio.
The ETF tracks the performance of the Bloomberg US Intermediate Government/ Credit Index. GVI has an AUM of $2.99 billion. The fund has a total of 5500 holdings. Its top holdings include US Treasury Notes 1.25%, due September 30, 2028, with a 1.21% weighting; US Treasury Notes 4.125%, due June 15, 2026, at 1.16%; and US Treasury Notes 4.125%, due January 31, 2025, at 1.02%.
GVI has an expense ratio of 0.20%, lower than the category average of 0.41%. Over the past month, its fund inflows were $200.75 million and $414.45 million over the past six months. Also, it has a beta of 0.08.
GVI’s annual dividend of $2.50 yields 2.44% on the prevailing share price. Its four-year average yield is 1.88%. The fund’s dividend payouts have increased at a CAGR of 2.4% over the past five years.
The ETF has declined 2.8% over the past three months to close the last trading session at $102.23. The fund has a NAV of $102.15 as of August 11, 2023.
GVI’s POWR Ratings reflect this strong outlook. The ETF’s overall A rating translates to a Strong Buy in our proprietary rating system.
GVI has a grade of A for Buy & Hold and Trade and a B for Peer. Of the 50 ETFs in the same group, it is ranked #3.
To access all the POWR Ratings for GVI, click here.
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LMBS shares were unchanged in premarket trading Monday. Year-to-date, LMBS has gained 2.30%, versus a 17.41% rise in the benchmark S&P 500 index during the same period.
About the Author: Mangeet Kaur Bouns
Mangeet’s keen interest in the stock market led her to become an investment researcher and financial journalist. Using her fundamental approach to analyzing stocks, Mangeet’s looks to help retail investors understand the underlying factors before making investment decisions.