Our portfolio includes bond ETFs that allow us to precisely manage the level of risk at every allocation, and improve the risk-adjusted performance of the portfolio at higher risk levels. The exact amounts of each bond ETF will depend on the allocation you choose. Our bond ETFs include:
Short-Term Treasuries - iShares Short-Term Treasury Bond Index ETF (SHV)
Short-Term Treasuries have maturities between one month and one year. This extremely low-risk asset class is a cash alternative that generates nominal benefit through interest payments, and de-risks the portfolio at safer allocations.
Inflation Protected Bond - Vanguard Short-term Inflation-Protected Treasury Bond Index ETF (VTIP)
Inflation Protected Bonds are issued by the US Treasury with the value of the principal (but not interest payments) indexed to inflation. This allocation serves to insulate a part of the portfolio from the depreciating effects of inflation while also having historically low correlation with other asset classes.
US High Quality Bonds (IRA and 401(k) accounts) - Vanguard US Total Bond Market Index ETF (BND)
US High Quality Bonds provide exposure to the US investment-grade bond market, bringing stability to the portfolio with higher income levels than US Treasuries. While the credit risk is very low, the average bond maturity of 7 years means there is some interest rate risk.
National Municipal Bonds (Taxable accounts)- iShares National AMT-Free Muni Bond Index ETF (MUB)
Municipal Bonds are federally tax-exempt bonds issued by state and regional governments to finance capital expenditures. While municipal bond credit risk is slightly higher than US Treasuries, it is still quite low and coupled with favorable after-tax income makes them an excellent addition to taxable portfolios.
US Corporate Bonds - iShares Corporate Bond Index ETF (LQD)
US Corporate Bonds are issued by corporations to finance business activities. Corporate bonds generally offer much more attractive yields and opportunity for capital appreciation to compensate investors for default risk. They also diversify the fixed-income portfolio, resulting in higher risk-adjusted returns.
International Market Bonds - Vanguard Total International Bond Index ETF (BNDX)
International Bonds are issued by non-US developed market governments and organizations. They have high credit quality and provide interest rate diversification for a bond portfolio, resulting in higher risk-adjusted returns.
Emerging Market Bond - iShares J.P. Morgan USD Emerging Markets Bond ETF (EMB)
Emerging Markets Bonds are dollar-denominated bonds issued by governments with economies that are rapidly growing and industrializing. This asset class is higher risk but also offers a higher expected return than developed markets' bonds or US Treasuries. Their unusually low correlation with other bonds result in higher risk-adjusted performance for the portfolio.
Why these bond ETFs?
These bonds ETFs allow us to choose a precise level of risk, and then get the best possible return at that level of risk by balancing four different growth factors: U.S. interest rate risk, U.S. company credit risk, international interest rate risk, and international credit risk. When applicable, we also consider the after-tax benefits of allocating to federally tax-exempt municipal bonds.
Taking on a higher exposure to any of these factors means higher expected returns, with higher potential for short-term losses. However, by blending them together intelligently, we can maintain the return level and reduce the severity of losses.