Bond Mutual Funds and ETFs
Bonds are often chosen by investors as a way to introduce greater diversification into their portfolio and for their potential to generate additional income. Instead of purchasing an individual bond directly, a bond mutual fund can be a convenient way to gain exposure to bonds by participating in their professionally managed and diversified fixed income portfolio. Both bond mutual funds and ETFs pool together different bonds of varying amounts and types to form a single portfolio that can be purchased as a share, similar to that of a common stock. If you have a smaller amount of money to invest, purchasing either an ETF or a mutual fund requires less money than if you were to purchase each bond individually. In other words, if you want to put $100 towards a bond fund, you are immediately exposed to all the bonds inside the fund at a non-discriminatory comparable rate to your contributions. However, there are not many options, if any, available to the average investor who would wish to purchase a bond with only $100 to invest. By investing in a bond fund, you are able to participate in the bond market and reap the benefits without needing to purchase or manage the bonds yourself. In addition, when it comes to mutual funds and ETFs, there are a variety of bond-oriented funds to choose from to meet each investor’s risk tolerance and income needs.
Bond ETF
Similar to stocks, bond ETFs trade on exchanges and can offer investors the safety of bonds with the liquidity that exchange-trading provides. A few of the benefits and possible associated drawbacks of bond ETFs are as follows:
- Liquidity: You are able to purchase or sell an ETF at any time of the day with the price of the ETF relying on supply and demand. However, because ETFs relies on supply and demand, in times of stressed or illiquid markets, the ETFs price may be well below its net asset value for a long period of time. Still, one benefit to an ETF is that you can buy a bond ETF on margin or, if you rather, sell your shares short.
- Costs: Bond ETFs are typically cheaper than a mutual fund since the operating costs involved with the ETF can be much lower than their counterpart.
- Commissions: There may be trading commissions involved with each purchase or sale of a share.
Bond Mutual Fund
A bond mutual fund is a mutual fund that invests predominately in bonds. Funds are guided by a stated objective which normally focuses on a specific sector, such as corporate or Treasury bonds, a broad category, such as investment grade or high yield securities, or a particular time horizon, such as short-, intermediate-, or long-term bonds. A few of the benefits and possible associated drawbacks of investing in a bond mutual fund are as follows:
- Liquidity: Mutual funds are traded once a day after market hours with its price depending upon its net asset value (NAV), which is calculated at the end of each trading day. However, because you buy and sell a bond mutual fund at its NAV, there is a certain amount of protection for investors by being able to liquidate at the true cost of the portfolio rather at a price reliant upon supply and demand.
- Costs: Since a mutual fund normally involves a more active portfolio management, its total expense ratio is typically higher than that of an ETF.
- Charges: There may also be sales charges involved with each purchase or sale of a mutual fund share.
How can I invest in a bond mutual fund or ETF?
All of our advisors at Florida Financial are knowledgeable on the many different types of mutual funds and ETFs available and can help guide you to make sure one of them is the right choice for you. Contact us today for a free consultation.
Note: All investments involve potential risks, including loss of principal. Please consult with your professionals regarding your specific situation prior to making any investment decisions.
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