I would probably not recommend Zecco anymore. I would recommend Scottrade–it is cheap, they charge no annoying fees, and they have a large number of mutual funds that can be bought at no cost.

Of course bonds are not risk-free. And buying bonds directly is good. But for a long-term buy-and-hold investor, interest rate changes will balance out over time. And a bond-fund with an average maturity of 5.7 years will on average have 100% turnover every 5.7 years. And because it is an index fund those bonds will be held to maturity.

While eurobonds or other foreign bonds would be nice, there are no cheap options for owning them. And an extra .4% in management fees would wipe out any extra yield they might offer.

I’m not sure that I necessarily agree with this statement. There are often times, where I’ll find foreign bonds that contain identical terms to their domestic counterparts, but they will yield slightly more. These aren’t international companies per se, but rather Eurobonds that are based on the credits of domestic companies. Irregardless of whether domestic or foreign bonds offer a more attractive opportunity though, I would still point out that there is risk in the Vanguard funds.

Too often investors will use mutual funds to buy treasury bonds, but it really doesn’t make sense. If you want the protection, then buy the bonds directly and avoid paying even a modest fee to a bond manager. If you don’t mind paying a small expense ratio to get a certain amount of expertise, then take advantage of the diversification that mutual funds give, in order to look at high yield bonds or other more aggressive investments. You can lose it all on one company, but it’d be tough to lose 100% from a diversified junk bond portfolio.

The problem with assuming that a AAA bond fund doesn’t have risk, is that it ignores the interest rate exposure that you are taking. Now in your case, you are talking about pretty short term investments, so this is limited, but wouldn’t it be better to have an exit strategy already built into your investment, instead of hoping that yields stay low, so that you can sell your fund on the open market for what you paid for it? I like the maturity date that an individual bond offers, even if I have to work a little harder in order to find it.

I’d also like to point out that Zecco is great, but they aren’t the low cost alternative that people think they are. Part of the management fee that you pay on an ETF usually goes towards leverage. Because Zecco makes their money by charging high margin rates and paying out low money market yields, some investors would be better off paying a percent each year, over trying to replicate this on their own. It doesn’t mean that ETF’s don’t have their own set of problems, but it’s important to realize that all those free trades are being subsidized by below average yields on your cash. If you do a lot of stock trading this probably doesn’t matter, but if you use a lot of margin or keep large cash balances, you may be better off paying higher commissions, but then making it up on superior cash investments.