Add Bond ETFs to Your Investment Portfolio

Investing in bond ETFs can provide our portfolio with some needed stability. Bear markets tend to destroy poorly constructed portfolios. You should examine your portfolio very closely and determine whether you are over-exposed to individual stock, or single asset classes. Many people with these problematic portfolios do not realize it until it’s too late.  A good way to stabilize your investments is to have exposure to far more stable bonds. Investing in individual bonds can be expensive and bothersome. Transactions involving individual bonds often have higher fees associated with them. Also, investing in individual bonds is often very risky. A good way to accomplish stability this is to invest in ETFs with underlying bonds. Investing in ETFs is often a better option than investing in mutual funds because ETFs tend to have far fewer annual expenses than mutual funds.

Diversifying Bond Holdings

ETFs are a good way to diversify between bond holdings.  This diversity, even between relatively stable bonds, provides further safety in tough economic times.

Invest in Index Funds

It is important to invest in the right ETFs. You should build a strong foundation. Not all bond funds are equal. You should trust indexes. Avoid managed funds that often crumble in tough economic times. These index funds also cost less than their managed counterparts. SPDR, Barclays Aggregate Bond ETF, and the Vanguard Total Bond Market ETF are examples of this kind of fund.

Bond ETFs are advantageous over mutual funds because they are more liquid. They can be traded throughout the day. For this reason, even mutual fund managers often invest in ETFs for the instant allocation that they want. ETDs are also taxed at a lower rate than mutual funds. 

Treasury Bond ETFs

Treasury Bonds have very little default risk which means that there is little risk that the parties you are lending to will not pay you back with the indicated interest. Longer maturities pay higher interest rates, but ETFs do not generally hold bonds until maturity, they are constantly rolled over to maintain the target maturity of the fund. Some popular treasury ETFs are SPDR, Barclays 1-3 Month T-Bill, ETF and iShares 3-7 Year Treasury Bonds.

Corporate Bond ETFs

Corporate Bond ETFs have higher credit risk than Treasury issues. You can determine their riskiness by the ratings assigned to them. iShares Barclays Credit Bond is an example of such an ETF.

Municipal Bond ETFs

The interest you get from bonds issued by state and local governments cannot be taxed by the federal government, and you are helping for the payment of municipal projects such as roads and parks. They are riskier than Treasury Bonds, but very attractive for high tax bracket investors. Examples of such ETFs are SPDR Barclays Short-Term Municipal Bond ETF and Market Vectors Intermediate Municipal Index ETF.

Drawbacks

Bonds in general suffer from rising interest rates and from inflation. Inflation or rising debt can cause higher interest rates, which reduce the value of bonds. This risk is greater with ETFs than just holding bonds outright. This is because the ETFs underlying bond holdings might not be held to maturity.

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