What You Need to Ask About Bond ETFs

You can opt-out at any time.

There are a lot of arguments as to why ETFs are advantageous over mutual funds. but out of all the different ETFs available, the benefits of exchange traded funds are probably most apparent when it comes to bond ETFs.

What Are Bond ETFs?

Just like other ETFs. bond ETFs seek to emulate a correlating index or underlying investment product. In the case with bond ETFs however, it’s not as simple as with other funds like oil ETFs or energy ETFs .

Bonds themselves are fixed income assets that are not very liquid. Most investors hold bonds until maturity and do not typically trade them on secondary markets like stocks and indexes. Also, pricing information is not traditionally transparent for bonds.

This is the opposite case for a bond ETF, which needs to be liquid, available to secondary markets, and transparent when it comes to historical pricing. So as you can see, bond ETF construction has a few obstacles to overcome. However, once the bond ETFs are designed, they work just like regular ETFs and track a correlating bond index or product.

How Do Bond ETFs Work?

As we said, bond ETFs need to be liquid so they can be traded on exchange floors. However, bonds are notorious for being illiquid. The work-around is that a bond ETF usually consists of only the largest and most liquid bonds in the underlying bond index. This gives the bond ETF the ability to emulate the index and be more “trader friendly” at the same time.

Also, bond ETFs pay out interest with a monthly dividend. even though capital gains are paid out on an annual basis. And while that does give bond funds the same tax advantages as traditional ETFs. it doesn’t play as big a role in bond ETFs because bond returns are not as heavily impacted by capital gains as stocks are.

Are There Different Types of Bond ETFs?

There are many different bond ETFs to explore for your ETF investing strategy. International bond ETFs. corporate. government. short, medium, and long-term, and even junk bond ETFs. And while there are many types of ETFs in the investing world, there are many types of bond ETFs as well. See for yourself.

How Do I Include Bond ETFs in My Portfolio?

If you think you are ready to get started with bond ETFs, make sure you conduct thorough research first. Are you looking for a revenue stream, do you understand the tax implications, do you know which type of bond ETF is the best fit for your portfolio?

You need to answer these questions and many others. Research different types of bond ETFs like the iShares Barclays Aggregate Bond Fund (AGG) or the SPDR Barclays Capital Long Credit Bond ETF (LWC) and see how they react to market conditions. Understand the advantages and disadvantages of bond ETFs. Once you have a firm grasp of the world of bond ETFs, only then is it time to include them in your portfolio. And that’s when you should check out our list of bond ETFs

If you are interested in international bond ETFs, look no further than our List of International Bond ETFs