These 5 Dividend Paying Bond ETF’s Are Beating The S&P

By Robert Hauver

The catastrophe that was predicted when Standard & Poors downgraded U.S. debt this summer didn’t faze the bond market. But it’s been the stock market that’s been hit, not the U.S. bond market, which just kept rising. Not that many dividend stocks held up during the correction, but these dividend paying ETF’s have beaten the S&P over the past month, quarter, and longer term:

T-BondPerf

Dividends Info: Even though the dividend yields on these ETF’s aren’t comparable to some high dividend stocks, they certainly are reasonable. Three of them pay monthly dividends, while the 2 others pay quarterly.

T-Bond-Divs

As of December 2010, the U.S. fixed income market was valued at $36 trillion, approx. twice the size of the U.S. stock market . Treasuries are 24% of this market, mortgage related are 25%, corporate debt is 21%, and the balance is in agency, money market, municipal, and asset-backed instruments. (Source: Securities Industry & Financial Markets Assoc.) (There’s a brief profile of all 5 ETF’s at the end of this article.)

Technical Data:

T-Bonds-RSI-Vol'y

All of these Bond ETF’s are trading above their 20-, 50-, and 200-day moving avgs.:

T-BondAvgs

So, given their outstanding share performance,is now the time to invest in any of these ETF’s? That depends upon your outlook – If you think the market is going to pull back again this fall/winter, then Bond ETF’s would probably be a good bet.  However, a safer approach might be to wait for a market bounce/rally, as these ETF’s are all near their overbought regions. Since these ETF’s usually decline when the market goes up, you’d be able to buy them cheaper.

For example, this chart and stochastic shows that an investor who bought ZROZ in late June, when the stochastic chart was showing it to be oversold, had very good timing, from a low of $69.65 in late June, to a high of $97.69 in Sept.  Even with this good timing, it’s been a bumpy ride along the way, with an approx. 10% draw-down, and 15% bounce-back in August, as the market bounced and retreated. During this most recent market bounce, ZROZ has fallen slightly below its overbought area, but has a long way to go to reach the oversold region:

T-Bond-ZROZ-Chart

Options: Only TLT has options available, and at the money covered calls and cash secured puts for Nov. 2012, for example are currently yielding approx. 20%-plus annualized. There are more details on this and many other option-selling trades in our Covered Calls Table and Cash Secured Puts Table.

Funds Synopses:

ZROZ: BofA Merrill Lynch Long U.S. Treasury Principal STRIPS Index is an unmanaged index comprised of long maturity Separate Trading of Registered Interest and Principal of Securities (“STRIPS”) representing the final principal payment of U.S. Treasury bonds. The principal STRIPS comprising the Underlying Index must have 25 years or more remaining term to final maturity and must be stripped from U.S. Treasury bonds having at least $1 billion in outstanding face value.

EDV: Seeks to track the performance of the Barclays Capital U.S. Treasury STRIPS 20–30 Year Equal Par Bond Index. Passively managed using index sampling.

TLT: The iShares Barclays 20+ Year Treasury Bond Fund seeks to approximate the total rate of return of the long-term sector of the United States Treasury market as defined by the Barclays Capital U.S. 20+ Year Treasury Bond Index.

TLO: Seeks to provide investment results that, before fees and expenses, correspond generally to the price and yield performance of the Barclays Capital Long U.S. Treasury Index (index ticker: LUTLTRUU).

VGLT: Maintains a dollar-weighted average maturity of 10 to 25 years, and invests primarily in government bonds.

Disclosure: Author is long TLT.

Disclaimer: This article is written for informational purposes only and isn’t intended as investment advice.