What are bond ETFs and how do they serve the objectives of the investor’s greater wealth management strategy? Investors can choose from hundreds of exchange traded funds (ETFs) that cover industry sectors and asset classes ranging from the mundane through the exotic. Bond ETFs sit squarely in the center of that range, providing investors with the advantages of a bond fund and the added liquidity and transparency of an ETF.
What are bond ETFs and how do they serve the objectives of the investor’s greater wealth management strategy? Investors can choose from hundreds of exchange traded funds (ETFs) that cover industry sectors and asset classes ranging from the mundane through the exotic. Bond ETFs sit squarely in the center of that range, providing investors with the advantages of a bond fund and the added liquidity and transparency of an ETF.
The investment advisors on the 6th Avenue Team begin each client relationship with an in-depth analysis of the client’s strategy. When we are confident that we comprehend your financial goals, risk tolerance, investment sophistication, and desires for investment guidance, we propose an investment plan that includes targeted recommendations. We include bond ETFs in an investment plan only if the bond ETFs we recommend serves the investor’s needs.
How Does a Bond ETF Work?
Like traditional bond funds, bond ETFs hold a portfolio of hundreds or thousands of separate bonds that are within the bond ETF’s stated strategy, including, for example, U.S. or foreign treasuries, high-yield corporate debt, and bonds with short- or long-term maturity dates.
Bond ETFs will have the same advantages and benefits of other types of ETFs, including:
· Intraday trading: Bond ETFs are traded on exchanges and can be bought and sold in real time during a trading day, rather than after markets close. This allows investors to realize all of the benefits of a traditional bond investment with immediate price information and enhanced liquidity that may be absent from more traditional bond investments.
· Transparency: Most bond ETFs publicly disclose their daily bond holdings, giving investors in-depth knowledge and information about exactly which bonds are held within the bond ETF’s portfolio. This is a crucial feature for bond investors who are concerned about diversifying their portfolios with a variety of different bond holdings.
· No minimum holding periods: Bond ETFs will not impose a penalty if an investor liquidates his or her holding within a short time after making the investment. Bond ETFs may therefore be an ideal option for an investor who is looking for a very short-term liquid vehicle to hold funds pending another investment.
How is a Bond ETF Different from a Bond Fund?
Bond ETFs hold hundreds or thousands of different bonds, all of which will likely have different maturity dates and fluctuating yields and values. As with other bond investments, bond ETFs will generally react to interest fluctuations in an inverse manner, representing higher values when interest rates decline and lower values when rates increase. Beyond this basic principle, bond ETF yields have more complicated dimensions.
Understanding bond ETF yields requires consideration of at least four different calculations:
· Hypothetical yield to maturity. This is a weighted average of all of a bond ETF’s holdings if the fund were to hold all of its assets through to their maturity.
· 30-Day SEC yield. This is an annualized rolling measure of a bond fund’s income over the immediate past 30 days, less the bond fund’s expenses. Investors should look at 30-day SEC yields at different points over a bond ETF’s lifespan to smooth out yield spikes that are caused by large one-time distributions.
· Distribution yield. This is an annualized ratio of the bond ETF’s most recent distributions divided by its current net asset value (NAV). A bond ETF’s NAV will generally track its market price, but that price may have greater variations from NAV than is seen in a more traditional bond fund.
· 12–month yield. This is the actual ratio of distributions actually paid by a bond ETF over a 12-month period divided by the bond ETF’s then-current NAV.
How Do You Select Bond ETFs for Investment?
Investors who are considering bond ETFs apart from a comprehensive investment strategy might easily be dissuaded from a bond ETF investment because of some adverse opinions from market analysts. Some analysts have criticized bond ETFs as delivering weaker performance because of their higher management expense loads. This and other criticisms, however, tend to be delivered in a vacuum that fails to consider how different pieces of a managed investment portfolio should be selected to work together to satisfy an individualized investment strategy.
No single bond ETF is the best bond ETF for every investor. Rather the best bond ETF or other asset for any specific investor is the one that provides the greatest value within the context of that investor’s strategy. That strategy will also change and evolve over time, and an appropriate bond ETF today may well be different than the bond ETF that serves his or her portfolio tomorrow.
The 6th Avenue Team at Ingalls & Snyder, LLC gives our clients far more than just a handful of bond ETF investment strategies. We advise individuals, institutions, and not-for-profits on investing their financial assets and creating generational strategies for wealth maintenance and growth. We will recommend bond ETFs if they serve the specific objectives of a client.
To schedule an in-office appointment with one of our advisors, please call our midtown Manhattan offices directly.
CONTACT US
Fill out the contact form below and we’ll get back to you as soon as possible.
The 6th Avenue Team Investment Philosophy is built upon a holistic, tax efficient approach to achieving your long-term financial goals.
The 6th Avenue Team Investment Philosophy is built upon a holistic, tax efficient approach to achieving your long-term financial goals.
SUBSCRIBE
Sign up to receive the latest news from the 6th Avenue Team.
WE RESPECT YOUR PRIVACY AND NEVER SELL YOUR EMAIL ADDRESS
SUBSCRIBE
The 6th Avenue Team publishes the latest news and market insights for investors at no charge. Stay current; sign up now.
We never buy, sell, or trade your information.