That said, choosing an active or passive bond ETF is not an either/or choice. “We find merit in using both of them in tandem,” says Steven Frazier at Frazier Investment Management in Wakefield, R.I. He adds that actively-managed funds are the better choice for less-liquid bond markets such as high-yield, floating-rate or enhanced short-term yield funds.
The PIMCO Enhanced Short Maturity Active ETF (MINT), which carries a 0.42 percent expense ratio and gets a Gold Star rating from Morningstar, is a good example. The fund sports a 2.81 percent 30-day SEC yield and has also gained an average 1.51 percent in value annually over the past five years. That beats the Morningstar UltraShort bond category average by around 30 basis points per year.
Many of our risk-averse clients are approaching or are already in retirement. And they are highly sensitive to capital gains that many bond ETFs may throw off. For them, municipal bond ETFs make a lot more sense. For clients that live in states that don’t have income taxes, a fund like the iShares National Muni Bond ETF (MUB) could be a good choice. It carries a 0.07 percent expense ratio and sports a 2.21 percent 30-day SEC yield. That’s a tax-equivalent yield of 2.84 percent for clients in the 22 percent tax bracket.
A state-specific muni bond ETF makes sense for clients who live in states that levy income taxes and have combined tax rates potentially approaching 30 percent. As an example, the iShares New York Muni Bond ETF (NYF) carries a higher 0.25 percent expense ratio, yet the tax factor helps turn its 1.99 percent 30-day SEC yield into an effective yield of 2.83 percent on a tax-adjusted basis for New York State residents.
While short-term bond funds lack sex appeal due to their relatively low yields, they can play a helpful role for risk-averse or market-wary clients.
David Sterman is a certified financial planner and operates Huguenot Financial Planning, a New York State-based fee-only financial advisory firm.