have always appealed to conservative investors looking
for a safe place to park money while receiving a steady
and predictable return.
a growing number of investors are steering away from
buying individual bonds because of the research required
and the high cost of diversifying a portfolio. Instead,
they are putting their money in bond exchange traded
funds, which invest in many bonds.
financial advisers believe that might be a riskier move.
value of a bond ETF goes up and down throughout the
trading day like a stock and can be traded like a stock.
Investors also could lose their principal.
challenge with bond ETFs is you are buying the debt in a
bond ETF with little regard to the creditworthiness of
the underlying bond issuers," said Matthew Helfrich,
president of Waldron Private Wealth in Bridgeville, Pa.
you have bond issuers who are already drunk on debt, you
could — by buying their ETF — be giving them another
makes bond ETFs more risky than individual bonds, which
typically sell for a par value of $1,000 each, is that
individual bonds have a fixed date at which they mature
and investors get their $1,000 back.
ETFs never mature because additional bonds are
continually being bought and sold, therefore they can
never offer the same protection for an investor’s
just by investing in the exchange traded fund, investors
can be reducing the issuer’s creditworthiness,
Helfrich said, adding that investors are adding money to
a pool of funds that will be used by companies that may
not be as creditworthy as buyers would prefer.
ETFs can be worthwhile for broad exposure to the bond
market and the flexibility to trade, but you have to
know exactly what you are doing," Helfrich said.
the Federal Reserve on course to continue raising
interest rates for the foreseeable future, fixed-income
investments, such as bonds, will be vulnerable. As
interest rates rise, the value of existing bonds paying
lower yields will fall as new bonds paying a higher
yield gain value.
owners of individual bonds will still receive all of
their principal when a bond matures, regardless of how
high rates have climbed.
risk of losing money has not stopped investors from
embracing bond ETFs. Data from the Washington-based
Investment Company Institute show the total net assets
in bond mutual funds and bond exchange traded funds grew
from $57 million in 2008 to $490 million in May 2017.
good news is that bond ETFs provide diversification,
which is crucial. But the bad news is there are hidden
land mines in bond ETFs," said Andrew Stoltmann, a
securities lawyer based in Chicago. "It’s very
hard to do your due diligence on the quality of the
bonds inside the bond ETF because there are so
same advantages and disadvantages apply to bond mutual
funds, which are actively managed and often charge
higher fees than bond ETFs.
ETFs, which charge expenses of less than a half a
percent, have grown at a significantly faster rate than
bond mutual funds, which usually charge fees of about 1
ETFs, like bond mutual funds, come in a variety of
flavors from Treasurys to municipal and corporate bonds.
Both pay regular dividends to investors. In addition to
being cheaper, bond ETFs are more tradable and often
more transparent than bond mutual funds.
financial adviser Robert Fragasso, chairman and CEO of
Fragasso Financial Advisors, Downtown, said his firm
uses bond ETFs in client portfolios while recognizing
that all of them are not created equal.
exchange traded funds will disclose to the public their
holdings every day, in addition to the quarterly
disclosure required for all mutual funds.
challenge, Fragasso said, is that there could be dozens
of bonds in an ETF with varying maturity dates and
credit qualities, which require portfolio managers to
devote considerable research before selecting a fund for
future value of a bond ETF is contingent on knowing the
dynamics of the bonds inside the ETF," he said. He
said investors need to understand the maturity or the
credit quality of the bonds in the fund.
later on when they’ve lost 20 percent of the value of
the investment, they will cry that it’s a lousy
product when in fact the fault lies squarely on the
buyer who didn’t understand what they bought," he
said. "There are hundreds of bond ETFs out there,
all with different profiles and different purposes. The
(average retail buyer) is usually unaware of the