ETF Bond: An Exciting Bond?

Bonds have never been known as glamorous, but since they’ve been teamed up with ETFs, they may be exciting enough for your portfolio. Here's a look at bond ETFs.

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Since 1993, exchange traded funds (ETFs) have provided another investment tool for Americans. ETFs may offer easy trading options and their convenience, along with their added bonus: diversification.

In fact, according to the Investment Company Institute, since their inception, money invested in ETFs has grown to over $250 billion dollars.

ETFs mirror an index or focus on a specific industry or country. What sets them apart from mutual funds is that ETFs are traded like stocks. Rather than having an opportunity once a day to buy, ETFs are traded all day long. Their price is determined by the supply and demand of the fund itself, not necessarily the contents of the fund.

In sharp contrast to the increasing popularity of ETFs, bonds have always had a somewhat lackluster existence, at least in the eyes of most investors. Bonds aren’t fun or fancy or glamorous, but for some, they are considered one of the more reliable investment vehicles around.

So what if you could combine the diversification and convenience of an ETF with the characteristics of a bond? Such a product does exist, and it’s called a bond ETF. From December 2004 to July 2005, assets in bond ETFs grew from $8.5 billion to over $13 billion in only 8 months.1

Clearly, bond ETFs are catching on, but what makes them so attractive?

Bond exchange traded funds carry with them a great deal of transparency that hasn’t been experienced by many bond fund investors before. The added knowledge of a bond’s true value, with the ability of public trading, is new to many bond fund investors.

The diversification found with bond ETFs contrasts with the concept of a bond ladder, which buys and sells individual bonds, one at a time. Bond ETFs typically offer lower fees than that of its counterpart, the bond index fund. But there are fees nonetheless, including an ongoing maintenance fee. Like a stock, commissions are charged whenever your ETF is bought or sold. If you plan on a long-term strategy, this may not be a factor.

As with all investments, each product and investment strategy is meant for a particular investor. But bond ETFs offer a new, and surprisingly refreshing look at an old mainstay. As with all investments, they have their pros and cons, but if you’re looking for a  transparent tool with added convenience, combined with the bond characteristics, then a bond ETF may
be the right call.

Diversification seeks to reduce risk by spreading your investment dollars into various asset classes to add balance to your portfolio. However, using this methodology does not guarantee against the risk of loss in a declining market.