Why Bonds Are Better In an ETF
August 1st at 1:00am by Tom Lydon
What’s better: individual bonds or bonds encased in exchange traded funds (ETFs)? There’s a real case to be made for indexing. Click through for five reasons.
There are a few reasons that fixed-income assets do well when they are indexed, and the main focus is on relative returns. Ron Ryan, in a guest post for Index Universe, has five other reasons this structure is preferable:
- Asset Allocation. Bond index funds, Ryan says, are the best representation of the intended risk/reward of the fixed income asset class.
- Fees. The cost savings over time can add up when bonds are indexed; the fees to manage bond indexes are generally lower than those of active management.
- Tracking Error. ETFs generally have less tracking error.
- Transparency. Returns are published daily; active managers generally only publish quarterly or monthly returns. Daily return publishing leads to fewer surprises later on.
- Cost Effective. The hire and fire mode of active management is costly, as asset managers are not cheap. By indexing bonds, this cost can be reduced. In that same vein, a bond ETF can also give investors wider exposure at a lower cost. To buy the kind of diversification one bond ETF can give would often be prohibitively expensive for most investors.
Ryan is the co-founder and CEO of Ryan ALM Inc., an index provider and research firm.
For more stories about bond ETFs, visit our Bond ETF category.
