Bond ETFs are alive and well. Proof? Billions of dollars have poured into them so far this year. With the many bond options available, an investor may have a hard time deciding which to choose. But if you take the time, there is bound to be something that fits your time horizons.
Bond funds are made up of hundreds of holdings with different maturities constantly being bought and sold, which leaves the investor unsure as to how much the investment will be at any given time or how much income an investor will receive, writes Robert Brokamp for The Motley Fool.
While you don’t need to be an expert on the finer points of bonds to invest in bond ETFs, it’s important to understand how bonds themselves work as well as issues that can impact bond or fund performance. Brokamp offers seven suggestions to help one make a more informed decision in bond investments:
- Diversification. Spread your money around. Corporations, municipalities and foreign governments all issue bonds. If one goes bankrupt, it doesn’t mean you lose everything, but you won’t get your money back for a while and probably not as much as the original investment.
- Investment-grade. Investment-grade issuers, those rated BBB or higher by Standard & Poor’s or Baa or higher by Moody’s, are less risky. Ones with A ratings are even safer. It should be noted that ratings for corporate bonds and muni bonds are on a different scale.
- True costs. Make sure to know what the after-cost yield of the bond will be before you buy it from a broker. There may be further costs beyond the commission.
- “Called.” Bonds have maturity dates, but many can also be “called” before then – a company decides to pay off its bondholders before maturity because of dropping interest rates or bonds’ credit rating improved. They would most likely issue new ones at a lower rate. Be sure to know the “yield-to-call” if it is applicable.
- Good deal? MSRB.org and InvestingInBonds.com provide trade history, yield, price and ratings of bonds.
- Primary market. When bonds are first sold on the primary market, they are usually sold in $1,000 increments and the issuer doesn’t charge a commission or markup. Changes in interest or the issuer’s financial stability will shift the value of the bond after the primary market. It should be noted that accessing the primary market isn’t easy, but one can try and get an account with a brokerage that underwrites bond offerings or some bigger discount brokers.
- Uncle Sam. Savings bonds, Treasuries, I bonds and Treasury Inflation-Protected Securities can be purchased directly from the government commission free.
Reflecting investor sentiment that there is little left to fear in the markets, the high-yield bond market is inching closer to par for the first time since 2007, trading at 99.48 cents on the dollar, reports Matthew Craft for Forbes.
Among the growing number of choices in bond ETFs include:
- iShares iBoxx $ Investment Grade Corp Bond ETF (LQD)
- SPDR Barclays Capital Short-Term Corporate Bond (SCPB)
- PowerShares Insured National Muni Bond (PZA)
- iShares S&P National Municipal Bond (MUB)
- SPDR Barclays Capital Municipal Bond (TFI)
- PIMCO Intermediate Municipal Bond Strategy Fund (MUNI)
- Grail McDonnell Intermediate Municipal Bond ETF (GMMB)
- SPDR Barclays Capital International Treasury Bond ETF (BWX)
- iShares S&P/Citi International Treasury Bond ETF (IGOV)
- iShares Barclays TIPs Bond ETF (TIP)
- SPDR Barclays Capital TIPS (IPE)
- PIMCO 1-5 Year U.S. TIPS (STPZ)
- iShares Barclays 1-3 Year Treasury (SHY)
- iShares Barclays 7-10 Year Treasury Fund (IEI)
- SPDR Barclays Capital High Yield Junk (JNK)
- iShares iBoxx $ High Yield Corporate Bond (HYG)
Max Chen contributed to this article.