Mix It Up With Bond ETFs

We put together a diversified bond portfolio using inexpensive exchange-traded funds.

Exchange-traded funds that invest in bonds overwhelmed every other ETF category in 2009 when measured by net cash inflows, drawing in more than $44 billion. At last report, there were 91 bond ETFs holding nearly $106 billion, up from 55 holding $57 billion a year ago. Because their costs are low and they generally make monthly cash distributions, bond ETFs are terrific tools for building an income portfolio. Set up a brokerage account and you can be in business in 15 minutes.

If you just want to gain broad exposure to bonds inside a tax-deferred investment plan, you may be satisfied with something as simple as the ETF version of Vanguard Total Bond Market (symbol BND). It owns more than 4,000 investment-grade bonds (those rated triple-B and higher), with more than two-thirds of its assets in government-backed debt. In early January, the ETF yielded 3.5%.

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Associate Editor, Kiplinger's Personal Finance