ETF

Bond ETFs: a way to diversify bond investments

Posted by MoneyController on 12.02.2024

Bond ETFs are investment instruments that, although their risks should not be underestimated, allow you to invest in bonds in a diversified, liquid way and with relatively small amounts of money.

Diversification

ETFs offer a way for many investors to access the bond market, with certain advantages. One of the first strengths of ETFs as investment funds is diversification: these financial instruments invest in a basket of securities that can be diversified in terms of (a) the number and (b) the type of bonds (government bonds, municipal bonds, corporate bonds, etc.) as well as (c) the credit quality (from junk bonds and high yield to investment grade).

Liquidity and management costs

The exchange-traded nature of ETFs allows these passive funds to enjoy liquidity comparable to that of individual securities: this is another strength of these passive securities (even compared to active funds, for example). Another strength that is always mentioned is the low management costs compared to other investment vehicles.

Transparency and accessibility

ETFs are also appreciated for their transparency: investors can easily check the performance of the fund and the composition of the portfolio (also because, it should be remembered, it is a fund that replicates the composition of an index). The accessibility of an ETF is not just about the relative ease with which one can subscribe to a share: ETFs also provide access to bonds (by buying fractions of them) that smaller investors would not have access to due to very high minimum purchase sizes.

Interest rates and monetary policy: a potential risk

As Gabriele Petrucciani points out in the Corriere della Sera, caution is needed because the bond market seems to have largely priced in the central banks' monetary policy forecasts. From a more general point of view, interest rates are an element that directly affects these ETFs and therefore also represents a risk.

Read also

What are ETFs and how do they work?

What are bonds and how do they work?

Why does it make sense to diversify your investment portfolio?

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