How Safe Are Bond ETFs? | ETF Trends

It’s been an unusual year that has caused investors of all types to re-examine the old ways of thinking when it comes to their exchange traded funds (ETFs). Typically, bonds have been seen as “safe,” but some got burned in that thinking.

In fact, bonds of all types took their licks this year. Tara Seigel Bernard for The New York Times explains that even though the bond market did not take a 40% decline like the general stock market did, they did suffer losses. Treasuries remained the lone place to hide, and diversified bonds bonds stuck it out, too.

The lesson here is that diversification is a key element to stave off as much loss as possible. ETFs offer instant diversification, while giving investors the kind of exposure to a range of bonds that would be costly if they were bought one by one.

Nevertheless, for the older investor, any loss in fixed income is unwelcome, and untimely, as “the return of principal is more important than the return on principal.” Conditions may worsen before they improve, so older investors should check that their bond investments are indeed what they thought they were.