Bank Account Earning Nothing? Try A Bond ETF Instead

market bondsLawrence Meyers:  For years and years, everyone has been lamenting how banks are paying nothing (literally) to hold money in interest-bearing checking and savings accounts. Alas, that is one big downside to interest rates being at all-time lows.

Sure, it costs next to nothing to borrow money, but one earns next to nothing in a bank account!

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There is a way to solve this if you have excess cash, but don’t want to subject it to too much risk. Thankfully, most brokerages allow you to link your brokerage account to a bank account, so you can move money back and forth. So instead of earning zip at the bank on your money, considering parking some of it in a bond ETF.

There are always risks when doing this, but the risks aren’t terribly great. Remember that in the short term, bonds could be subject to some kind of unexpected turbulence that takes the price of the bond down while forcing the interest rate higher. Indeed, you’ll want to make sure the Federal Reserve doesn’t raise rates anytime soon. Otherwise, you can earn a bit more in various types of bond ETFs.

One place to look is the SPDR Nuveen Barclays Short Term Municipal Bond ETF (NYSEARCA:SHM). Muni bonds are issued by various municipalities to finance government operations, like fixing roads and maintaining street lights and so on. The beauty of muni bonds is that they have pretty strong security behind them. They are either general obligation bonds – meaning the taxing power of the issuing government authority will back them – or they are revenue bonds, in which revenue from the infrastructure projects that they are being used for will fund the payments and principal.

This particular muni bond fund is highly diversified. About 55% are general obligation bonds at the state and local level. All are either triple-A or double-A rated. All have maturities under five years. The SHM fund is the most conservative play of the group, offering a 0.91% yield and a 0.9% return year-to-date.

If you want more yield with more risk, then think about going broad with the Vanguard Total Bond Market ETF (NYSEARCA:BND). Now, you have to be more careful here. Whereas the muni bond ETF above only has a price range of about 1.5% over the past year, this one has a 4.5% range, and it is sitting right in the middle of it.

It yields quite a bit more at 2.43%, and year-to-date has returned 1.11%. Still, it offers a lot of safety because it offers broad exposure to domestic investment-grade bonds, and its goal is to keep pace with domestic bond market returns. It also has a very low expense ratio of 0.07%, so you aren’t paying much for access to the better yield.

You have very little risk here in terms of diversification, with the fund holding over 7,700 different securities.

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