Will Investing in Bond ETFs Make You Safe or Sorry?

Having a strong fixed-income component in your portfolio is an important element of diversifying your assets to mitigate risk. For conservative income investors who want the safety and stability of bonds with less hassle, bond exchange-traded funds are a viable way to go because they boast transparency and low fees.

Bond ETFs are comprised of “baskets” of bonds that aim to replicate the performance of bonds like Treasuries, high-grade corporates — or even junk bonds. Because the bond ETFs trade throughout the day like stocks, they offer greater liquidity. Interest is paid to investors via dividends.

Generally speaking, bonds provide a safe haven for investors who fear the stock market�s fits and starts and who seek a hedge against inflation. But not all bond ETFs are created equal. Their relative safety and/or lack of volatility is directly related to the type of bond in the fund�s basket.

A raft of new ETFs have popped up lately to challenge the old notion that bond investing is a stodgier play than equities investing. The brave new world beyond Treasuries and high-grade corporate bonds includes emerging-markets and junk bond ETFs, and what�s best for you depends on your investment strategy. That�s why there�s no one-size-fits-all approach to investing in bond ETFs.

Here are six bond ETFs that are well suited for these three different investment strategies:

Treasuries, High-Grade Corporate Bonds Deliver Safety

For investors nearing retirement, ETFs that are comprised of Treasuries are less likely to be pummeled in a sour economy and offer a hedge against inflation. While ETFs in general are tax-friendly, interest on Treasuries usually is not taxable, giving those ETFs an added edge. Investment-grade corporate bonds are a safe bet, too. The downside: Low risk equals a low yield. And while good news buoys most other investments, it can make bond prices collapse and investors run for cover.

iShares Barclays 20+ Year Treasury Bond (NYSE:TLT) seeks to replicate the performance of the U.S. 20-year+ Treasury Bond Index. TLT has net assets of $3.25 billion and a yield of 3.4%. Three-year total return is 12.83%. iShares iBoxx $ Invest Grade Corp Bond (NYSE:LQD) invests 95% of its $14.75 billion in assets in U.S. dollar-denominated investment-grade corporate bonds. LQD has a yield of 4.6% and boasts a three-year total return of 13.51%.

Boost Yields With Emerging-Markets Bond ETFs

If your fixed-income strategy is a little more aggressive and you want to gain some exposure to emerging markets, ETFs that focus on bonds issued by emerging-market governments can deliver high yields at lower risk than emerging-markets equities, which have given investors a wild ride in recent months.

WisdomTree Emerging Markets Local Debt (NYSE:ELD) is a diverse, dollar-denominated emerging-markets debt benchmark. ELD has net assets of $1.42 billion and a yield of 4.54%. Its three-year total return is 11.87%. iShares JPMorgan USD Emerging Markets Bond (NYSE:EMB) is a non-diversified dollar-denominated emerging-markets debt fund. EMB has net assets of a yield of 5.01%, and its three-year total return is 10.65%.

Walk on the Wild Side With Junk Bonds

If you�re looking for a more aggressive play in bonds, consider junk bond ETFs. While they boast seductively high yields, their low credit ratings (below BBB) carry the risk profile of a Class 5 rapid.

SPDR Barclays Capital High Yield Bond ETF (NYSE:JNK) invests 80% of its $6.79 billion in assets in securities represented in its High-Yield Very Liquid Index. The fund has a yield of 8.55% and a three-year total return of 9.4%. Market Vectors High-Yield Municipal Index ETF (NYSE:HYD) invests in high-yield, long-term tax-exempt municipal bonds. With net assets of $268.35 million, it has a yield of 5.94% and a one-year total return of 3.63%. The tax exemption could be at risk if an Obama administration proposal to limit tax-exempt income for wealthy investors succeeds.

As of this writing, Susan J. Aluise did not hold a position in any of the ETFs mentioned here.