Bond exchange-traded funds (ETFs) are a type of ETF that exclusively invests in bonds. They are pretty similar to bond mutual funds. Kavan Choksi points out that bond ETFs hold a portfolio of bonds with varying strategies and holding periods ranging from long-term to short-term.
Kavan Choksi points out the advantageous aspects of bond ETFs
Bond ETFs are quite a welcome addition to the range of funds that investors have at their disposal when it comes to building a portfolio. Such exchange-traded funds provide a lot of benefits. Here are some of their prime advantageous features:
- Easy to manage: A bond ETF pays out the interest received by it on the bonds in its portfolio. As a result, a bond ETF can be a good way to set up an income stream without worrying about the redemption and maturity of individual bonds.
- Monthly dividends: A few of the most popular ETDs available today pay dividends on a monthly basis, thereby providing a regular income to the investors in a short time period. This enables the investors to effectively plan their budget by making use of the regular payouts from bond ETFs.
- Immediate diversification: A bond ETF can offer immediate diversification to the investor, both across their portfolio and also within the bond portion of their portfolio. For instance, by adding a bond ETF to the portfolio, one can make their returns more stable and resilient than it would be if it had just comprised of stocks. Portfolio diversification typically leads to lower risks.
- Targeted exposure to bonds: The bond portion of an investor’s portfolio may have multiple types of bond ETFs, like a long-term fund, intermediate-term fund and a short-term bond fund. Each of them shall respond in a distinctive manner to the changes in the interest rates. They typically generate a much less volatile portfolio if added to a stock-heavy portfolio. This becomes immensely valuable to the investors as they can choose the specific the segment of the market that they want to own.
- No need to analyze individual bonds: Instead of investigating a number of individual bonds, investors can choose the type of bonds they desire to add to their portfolio and subsequently “plug and play” using the ETF they want. This makes bond ETFs an ideal solution for financial advisers as well, including the ones who have to fill out a diversified portfolio of the client with the right level of risk and return.
- Affordable than buying bonds directly: Typically, the bond market is not as liquid as the share market. It has much wider bid-ask spreads that cost investors real money. By choosing to buy a bond ETF, one leverages the ability of the fund company to get better pricing on its bond purchases. This ultimately reduces the own expenses of the investor with the bond ETF.
Kavan Choksi further points out that bond ETFs make bond investing more accessible to individual investors. While the bond market can be somewhat opaque in comparison to the stock market, bond ETFs are traded on the stock market, much like a stock. Hence, they provide investors with the ability to move in and out of a position with ease.