The Advantages of Bond ETFs

If you are thinking of using exchange-traded fund [ETFs] for your fixed income portfolio, don't forget the eight new bond ETFs introduced by iShares. You might think that these are a bit boring compared to other ETFs on the market, but I bet you wish you had more in your portfolio over the past week. Don't forget income in your portfolio strategy.

Bond ETFs are portfolios of bonds that track the performance of a bond or index, such as 20-year Treasuries. They are bought and sold like stocks. Investors reap interest via monthly dividends, and any capital gains are paid out through an annual dividend. Bond ETFs don't mature, but they reflect the particular bond index's maturity and can be shorted, traded on margin and hedged with options. They offer investors many advantages: low expense ratios, close tracking to benchmarks, flexibility and ease of use, stop and /or limit orders, a round lot is not necessary, there are no investment minimums and options are available on many ETFs.

Joanne Von Alroth discusses some other advantages to using bond ETFs. It costs less to buy a bond ETF than to buy varying bonds of different maturities -- known as laddering. There's historical transparency in pricing and you avoid fees on each individual bond trade and the spreads that are built into stocks.

Also, you spread your risk if you invest in an ETF that tracks the 100 bonds on the corporate bond index -- such as iShares Lehman Aggregate Bond Fund (AGG) -- rather than putting all your money behind one or two corporate bonds.

Here is a great comparison of iShares' fourteen fixed income ETFs.

Comments

[Mahesh Reddy:]

thanks!.........for the info......Mahesh Reddy

2007 Mar 12 11:49 AM

[Dan Hector:]

Thanx for the article and the link the Von Alroth article. Do you know if any one has published a comparison of the costs of owning a Bond ETF vs the direct purchase of a bond portfolio?

It seems to me that to justify the MER on the ETF - which is annual - the MER must be lower than the difference in bond yield spread the ETF manager should be able to achieve compared to a retail investor (ignoring commissions on the ETF and assuming only treasuries in the portfolio so we can assume away default risk). This comparison would also vary depending on the average duration (a measure of transactions) of the bond portfolio.

It would be interesting to see this kind of comparison.

2007 Mar 12 01:37 PM

[JohnB:]

Don't forget Vanguard's upcoming Bond ETFs, etf.seekingalpha.com/a...

2007 Mar 13 12:21 PM