Bond ETFs: Tapping into Bonds in Various Ways - dummies

Bond ETFs: Tapping into Bonds in Various Ways

By Russell Wild

Like stocks, bonds can be bought individually, or you can invest in any of hundreds of bond mutual funds or about 150 bond ETFs. The primary reason for picking a bond fund over individual bonds is the same reason you might pick a stock fund over individual stocks: diversification.

Sure, you have to pay to get your bonds in fund form, but the management fees on bond ETFs tend to be very low. Conversely, the cost to trade individual bonds can be quite high. That’s especially true of corporate and municipal bonds.

You could consider buying individual bonds. Doing so may make sense, provided that you know how to get a good price on an individual bond and provided that you are buying a bond with little default risk (such as a Treasury bond). That’s especially true when you know that you will be needing x amount of money on y date. But for the most part, investors do better with low-cost, indexed bond funds.

Like stocks, bonds can (and should, if your portfolio is large enough) be broken up into different categories. Instead of U.S. and international, large, small, value, and growth (the way stocks are often broken up), bond categories may include U.S. government (both conventional and inflation-adjusted), corporate, international, and municipal bonds — all of varying maturity dates and credit ratings.

Unless you’re a billionaire, you simply can’t effectively own enough individual bonds to tap into each and every fixed income class.