These exchange-traded funds own either bonds with maturities averaging 9+ years or preferred stocks.
You may not want to lock in today’s crummy interest rates for a long time. But if you do, an ETF is a reasonable way to do it. Two funds from State Street’s SPDR family win Honor Roll status with best-in-category cost efficiencies: SPDR Portfolio Long Term Corporate Bond (SPLB) and SPDR Portfolio Long Term Treasury (SPTL).
The case for a fund, as opposed to an assortment of bonds bought individually, is strong if you are targeting corporate debt. You need diversification because any one issuer might go bust, and you need to put a lot of money into each position in order to keep your transaction costs down. Buying individual corporate bonds makes sense for centimillionaires. Ordinary folk are better off with an ETF.
The story is different for investors who want the greater safety (and slightly lower yields) of government debt. There’s no need for diversification, and the trading costs on Treasurys are tiny. So even a cost-efficient ETF is not necessarily an optimum choice.
Suppose you want long-term Treasury paper. SPTL is a portfolio of 47 Treasurys with maturities clustering around the 25-year mark. If you buy it you will be assessed 6 basis points ($6 a year per $10,000 invested) by the fund operator and you will also get nicked a small amount on purchase and sale via a bid/ask spread.
Would a single position in a Treasury due in 2043 suit your purposes? It might. That object can be bought and sold at Fidelity with a bid/ask spread that, when annualized, comes to less than 1 basis point, at least if you’re doing a trade of at least $200,000. There’s no additional commission and there’s no annual holding cost.
The single bond and the ETF are not the same thing. The ETF will replace aging bond positions in order to keep its average maturity close to where it is now. The single bond, in contrast, will see its maturity shrink over time from D25 years to 0. Depending on your future plans for the principal, this may be more a feature than a bug.
Our long-term fixed-income grouping contains a small category of preferred-stock funds. Neither is sufficiently cheap and liquid to qualify for the Honor Roll.
Best ETFs: Long-Term Bonds
Diversified and corporate bonds
| Ticker | Exchange-Traded Fund | Holding Cost1 | Liquidity Score2 | Assets ($bil) |
| CLY | iShares 10+ Year Credit Bond* | $64 | B | 0.6 |
| SPLB | SPDR Portfolio Long Term Corp Bd | 117 | B | 0.3 |
| VCLT | Vanguard Long-Term Corporate Bd | 122 | B | 2.1 |
| BLV | Vanguard Long-Term Bond | 124 | B | 2.2 |
| VTC | Vanguard Total Corporate Bond | 134 | C | 0.1 |
| CBND | SPDR Blmbg Barclays Isr Scr CorpBd | 251 | F | 0.02 |
| CORP | Pimco Investment Grade Corporate Bd | 350 | C | 0.9 |
| LKOR | FlexShares Crdt-Scrd US Lng Corp Bd | 387 | D | 0.03 |
| IG | Principal Investment Grd Corp Actv | 448 | B | 0.1 |
| BAB | PowerShares Taxable Municipal Bond | 456 | B | 0.9 |
| AGGE | IQ Enhanced Core Bond US | 539 | C | 0.1 |
| AGGP | IQ Enhanced Core Plus Bond US | 649 | C | 0.3 |
Treasury bonds
| SPTL | SPDR Portfolio Long Term Treasury* |
104 | B | 0.8 |
| EDV | Vanguard Extended Duration Trs | 125 | B | 0.6 |
| VGLT | Vanguard Long-Term Treasury | 127 | B | 0.7 |
| ILTB | iShares Core 10+ Year USD Bond | 136 | C | 0.2 |
| TLT | iShares 20+ Year Treasury Bond | 244 | A+ | 7.4 |
| TLH | iShares 10-20 Year Treasury Bond | 248 | B | 0.5 |
| ZROZ | Pimco 25+ Year Zero Coupon US Trs | 297 | C | 0.2 |
| PLW | PowerShares 1-30 Laddered Treasury | 415 | B | 0.1 |
Preferred stock
| PFFD | Global X US Preferred | 453 | D | 0.03 |
| PSK | SPDR Wells Fargo Preferred Stock | 541 | B | 0.5 |
*Best ETFs Honor Roll Member
1 Cumulative cost of holding a $10,000 position for a decade. Incorporates annual expense ratio, bid/ask spreads and cost offset from securities lending. 2Reflects bid/ask spreads and trading volume. A = easy to trade.
Data sources: Morningstar, Bloomberg, fund distributors.
