How to Track Bond Benchmarks in U.S.Corporate Debt

by Leslie McClintock

The simplest way to invest in a security that tracks the performance of U.S. corporate debt is to purchase an index mutual fund or exchange traded fund that is designed to replicate the corporate debt market as closely as possible. An index is simply an unmanaged group of bonds that represents the makeup of the entire market. One prominent example is the Barclays U.S. Corporate Index. You can't invest directly in an index -- it's a theoretical construct. However, you can buy shares in investments that closely replicate an index's performance.

1. Calculate how much of your total portfolio you want to have invested in bonds, as opposed to other asset classes such as stocks, real estate or precious metals. This discipline is called asset allocation. In most cases, bonds should only represent a portion of your investment portfolio.

2. Buy shares in a mutual fund that tracks a U.S. corporate bond index. One example is the Vanguard U.S. Corporate index. Fidelity, T.Rowe Price, TIAA-CREF and USAA also have low-cost bond index funds. Each of these fund families is no-load, meaning there is no sales charge to invest. If you want to use an investment adviser, however, you will likely incur a sales charge in exchange for the advice and guidance.

3. Purchase an exchange-traded fund, or ETF, that tracks the performance of the U.S. corporate debt market. An ETF is a kind of index fund that is traded over the stock exchanges, just like a stock. To buy one, contact a broker. You will likely incur a commission to buy and sell ETFs. But ETFs frequently have less cash in the portfolio because they don't have to sell assets to meet redemptions. This helps them track the index more closely and tends to help growth in bull markets. ETFs also frequently have lower expense ratios, which can make up for the commissions associated with buying and selling them -- especially when you hold on to the shares for a while. One example of an ETF that tracks the U.S. corporate bond market is the Barclays Credit Bond Fund.

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