In times of economic difficulty, it isn`t always easy to make a profit from investments. Exchange Traded Funds, or ETFs as they are more commonly known, are a popular option because of their similarity to stocks, but with tax advantages and a comparatively low cost. As with any type of investment, it pays to do some research.
One type of ETF, which has seen a rise in its popularity in recent times, is the Bond ETF. This is a type of ETF that invests exclusively in bonds, offering a way to trade on the stock market without the ownership of shares. Bond ETFs are much in demand during recessions and periods of economic fragility as they provide investors with a more secure and stable asset for their cash.
One of the other major advantages of a Bond ETF is that all types of investor are able to access both the current price as well as the historical data, a unique transparency for the bond market. This level of information is available because the ETF vehicle tracks the stock exchange.
However, while they offer a way to enter the bond market without being hampered by such an extreme lack of liquidity, there are some disadvantages. Bond ETFs do not offer any degree of flexibility meaning that an investor is unable to tailor a portfolio to suit individual needs, such as the level of income generated.
Bond ETFs can also be expensive as an ongoing management fee is chargeable. However, there are a growing number of Bond ETF providers in the market and some brokers are now offering the chance to invest commission-free.
There are similarities between Bond ETFs and actual bonds; both rise in cost as interest rates drop and vice versa. But while a bond will ultimately mature, an ETF will continue to follow the index until the investor decides otherwise.
The cost of holding a Bond ETF will be around 0.65% for long-term investments, compared to a typical charge of 1.2% for a bond mutual fund. Calculating the return in real terms for Bond ETFs is rather more complex and in many cases, is at best an estimate rather than an accurate figure.
To get an accurate idea of the return, the yield to maturity should be used, not the distribution yield. The latter only takes account of the performance over the previous 12 months while the former takes into account the likely changes and movements in the price and interest rates. To make the calculation even more precise, the management fee should be deducted from the yield to maturity. Bond ETFs also provide an income similar to the coupon on a bond, but it is usually paid on a monthly basis.
Bond ETFs are an important part of a portfolio for many investors and having a broker that offers diverse types of trade can help. A platform that offers services including forex news, as well as market information and live prices, can be a real asset for both novice traders as well as more experienced investors.