Is there any real benefit in owning Bond EFT’s?

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Since Bond EFT’s have not appreciated in value in the past 2 years (at least), would it not make more sense to invest in CASH or a similar product. The CASH returns are equal or better, with no loss of value, but I may be missing something.

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Asked on March 2, 2023 7:21 pm
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It really depends on what type of bond ETF you'd want to hold.

Bonds have naturally been under pressure because of rising interest rates. Imagine a $10,000 bond with a 2% yield during the pandemic compared to a $10,000 bond with a 5% yield now. What has to happen there to make the pandemic bond even remotely interesting? It has to drop in price.

The shorter the date to maturity, the less impacted the bond will be based on rising rates. This is because a low coupon bond maturing in 5 years is not as detrimental as a low coupon bond maturing in 30 years.

However, once rates stabilize or potentially even start coming down, bond prices will likely rise. I think now is actually the time to start looking at bonds (if they fit your portfolio of course) rather than ignoring them. That said, I'd certainly be waiting to see what rates do and I would want some stability before I'd touch any long term bond fund.

When you hold an individual bond, you can eliminate all pricing volatility by simply holding it to maturity. For example, you buy a $10,000 bond today, if rates continue to rise, that bond will fall in value. But when it matures, you'll get full value. So as long as you don't panic and sell, a non issue.

With an ETF however, this adds another element. Because these funds are constantly buying/selling/adding bonds to the fund, it tends to have a different impact. With a individual bond, your coupon will never change. You'll get the same money every year. But because a fund is adding/removing new bonds all the time, your yield is constantly fluctuating, so your income is not consistent.

I think the convenience and overall the broad diversification of a bond fund definitely makes it worth it for most. However, there's certainly benefits to just buying individual bonds as well.

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Posted by Dan Kent
Answered on March 4, 2023 11:27 am