Bond ETFs

Bond ETFs can diversify and help lower overall portfolio volatility over time, and their payments can be used to supplement your income. They are also usually cost-effective, and can provide access to a professionally managed (active or passive) portfolio. Take a closer look at the benefits.

When you buy shares of a bond ETF, you buy a piece of a bond portfolio. However, unlike individual bonds, most bond ETFs don’t have a maturity date. And ETFs trade on an exchange, like stocks, so you can buy or sell them at any time during the trading day.

Why would Schwab recommend bond ETFs?

Bond ETFs can give investors a way to diversify in many segments of the market through a single investment or a handful of investments. Generally, bond ETFs have lower transaction costs than individual bonds, and their prices are quoted throughout the day like stocks.

Bond ETFs are subject to many of the same risks as most fixed income securities, such as interest rate, credit, liquidity, reinvestment, inflation (or purchasing power), and market and event risks. In addition, investors face volatility and price-to-net-asset-value risk.

Volatility
Leveraged bond ETFs or ETFs with a more narrow focus may experience more severe price movements than traditional bond ETFs.

Price to net asset value
The market price of a bond ETF could vary from the net asset value (NAV) of the underlying securities. While the share value is usually close to the NAV, in some cases the price may be more or less than the underlying value per share.

Credit
The risk that a security will default or that its credit rating will be downgraded, resulting in a decrease in value for the security. The measurement of credit risk usually takes into consideration the risk of default, credit downgrade, or change in credit spread.

Liquidity
The relative ability of a security to be sold without substantial transaction costs or reduction of value. The harder it is to sell a security or the greater the loss in value resulting from a sale, the greater the liquidity risk.

Reinvestment
The risk that cash flows from an investment will be reinvested when interest rates are lower, resulting in a possible reduction in cash flow. To mitigate reinvestment risk, an investor can purchase non-callable bonds, which are not subject to early redemption, and/or ladder bond maturities at different intervals over time.

Inflation (purchasing power)
The risk that inflation will erode the real return on investment. This occurs when prices rise at a higher rate than investment returns and, as a result, money buys less in the future. The risk is greatest if you’re investing over long periods of time. Inflation-protected securities can be used to mitigate inflation risk.

Market and event
The risk that a change in the overall market environment or a specific occurrence such as a political incident will have a negative impact on the price/value of your investment.

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