Is it better to buy bonds or bond ETFs?
Bond ETFs often have lower expense ratios than bond funds. This is because ETFs have a passive management. Bond funds may have higher expenses because of the active management and the costs associated with mutual fund operations.
For many investors, investing in the right bond funds can be a better option than holding a portfolio of individual bonds. Bond ETFs can provide better diversification — often for a lower cost — can offer higher liquidity, and can be easier to implement.
Bond ETFs have ongoing management fees, eroding the initial trading spread advantage over time with a buy-and-hold strategy. Additionally, there is limited flexibility in creating a unique portfolio, as the ETF's portfolio manager determines the mix of bonds or follows an established index.
Bond funds offer a cost advantage over regular investors purchasing individual bonds, as they pay much lower bid/ask spreads on their bond transactions.
Interest rate changes are the primary culprit when bond exchange-traded funds (ETFs) lose value. As interest rates rise, the prices of existing bonds fall, which impacts the value of the ETFs holding these assets.
Summary. Bonds are a type of fixed-income investment. You can make money on a bond from interest payments and by selling it for more than you paid. You can lose money on a bond if you sell it for less than you paid or the issuer defaults on their payments.
Investors in bond ETFs could remain under pressure, as higher-for-longer interest rates could cause yields to rise further, and prices to fall.
| Bond Fund | Expense ratio |
|---|---|
| iShares 0-5 Year High Yield Corporate Bond ETF (SHYG) | 0.3% |
| Vanguard High-Yield Corporate Fund Investor Shares (VWEHX) | 0.23% |
| SPDR Bloomberg High Yield Bond ETF (JNK) | 0.4% |
| Schwab High Yield Bond ETF (SCYB) | 0.03% |
What are the disadvantages of bonds? Although bonds provide diversification, holding too much of your portfolio in this type of investment might be too conservative an approach. The trade-off you get with the stability of bonds is you will likely receive lower returns overall, historically, than stocks.
"Short-term bond ETFs like JPST have compelling yields, which will do well while short-term rates remain high," Francis says. "They also have the benefit of providing higher rates, even as the Federal Reserve begins reducing the overnight rates, which will immediately impact the yields on money market funds."
Why are my bonds losing money?
What causes bond prices to fall? Bond prices move in inverse fashion to interest rates, reflecting an important bond investing consideration known as interest rate risk. If bond yields decline, the value of bonds already on the market move higher. If bond yields rise, existing bonds lose value.
Including bonds in your investment mix makes sense even when interest rates may be rising. Bonds' interest component, a key aspect of total return, can help cushion price declines resulting from increasing interest rates.
If you are looking for predictable value and certainty for your financial goals, then individual bonds may be a better fit. Meanwhile, if you are looking for professional management and want greater diversification for your financial goals, then bond funds may be a better fit.
A bond ETF can provide you immediate diversification, both across your portfolio and within the bond portion of your portfolio. So, for example, by adding a bond ETF to your portfolio, your returns will tend to be more resilient and stable than if you had a portfolio consisting of only stocks.
| Total Bond Market ETF | 1-yr | 5-yr |
|---|---|---|
| Returns after taxes on distributions | 4.35% | 0.06% |
| Returns after taxes on distributions and sale of fund shares | 3.35% | 0.43% |
| Average Intermediate-Term Bond Fund | ||
| Returns before taxes | 5.59% | 1.05% |
Bond ETF income will come primarily in the form of dividends, but advisors should be aware that bond ETFs can also generate capital gains. Most bond ETFs seek to maintain a specific maturity over time.
| Face Value | Purchase Amount | 30-Year Value (Purchased May 1990) |
|---|---|---|
| $50 Bond | $100 | $207.36 |
| $100 Bond | $200 | $414.72 |
| $500 Bond | $400 | $1,036.80 |
| $1,000 Bond | $800 | $2,073.60 |
Do Bonds Lose Money in a Recession? Bonds can perform well in a recession as investors tend to flock to bonds rather than stocks in times of economic downturns. This is because stocks are riskier as they are more volatile when markets are not doing well.
There are many adages to help you determine how to allocate stocks and bonds in your portfolio. One says that the percentage of stocks in your portfolio should be equal to 100 minus your age. So, if you're 30, your portfolio should contain 70% stocks, 30% bonds (or other safe investments).
If sold prior to maturity, market price may be higher or lower than what you paid for the bond, leading to a capital gain or loss. If bought and held to maturity investor is not affected by market risk.
Should I sell my bonds now 2023?
The fixed rate rose to 0.4% in November 2022 so any I bond purchased after that date should be held. Likewise, you may want to hold on to I bonds issued between May and October 2023. Those I bonds have a fixed rate of 0.9%, which is the highest fixed rate in 16 years.
“Although some volatility may continue, we believe interest rates have peaked,” predicts Kathy Jones, chief fixed income strategist at the Schwab Center for Financial Research. “We expect lower Treasury yields and positive returns for investors in 2024.”
| Symbol | Name | Dividend Yield |
|---|---|---|
| YYY | Amplify High Income ETF | 12.20% |
| QRMI | Global X NASDAQ 100 Risk Managed Income ETF | 12.18% |
| KBWD | Invesco KBW High Dividend Yield Financial ETF | 12.06% |
| GOOY | YieldMax GOOGL Option Income Strategy ETF | 11.90% |
- J.P. Morgan Limited Duration Bond ETF JPLD.
- Pimco Enhanced Short Maturity Active ESG ETF EMNT.
- Pimco Enhanced Short Maturity Active ETF MINT.
- Schwab Short-Term U.S. Treasury ETF SCHO.
- SPDR Portfolio Short Term Treasury ETF SPTS.
- Vanguard Short-Term Corporate Bond ETF VCSH.
| Bond Fund | 30-day SEC yield* |
|---|---|
| Fidelity Inflation-Protected Bond Index Fund (FIPDX) | -0.10% |
| Vanguard Intermediate-Term Bond Index Admiral Shares (VBILX) | 4.4% |
| Dodge & Cox Global Bond X (DODLX) | 5.0%** |
| Fidelity Tax-Free Bond (FTABX) | 3.5% |
