Whether an investor is looking for safety or a way to diversify his portfolio, bond exchange traded funds (ETFs) have become popular investment tools that have a multitude of uses.
Michael Schmidt at Investopedia lists the following ways an investor can put bonds to use:
- Preserve principal. Bonds are essentially loans with scheduled repayments and maturities, therefore making them effective at preserving principal.
- Savings. Savings bonds have been used for decades as a method to build savings and provide one of the most secure and time-tested approaches to long-term savings. To make them even more attractive, they are guaranteed by the full faith and credit of the U.S. government
- Managing interest-rate risk. This type of risk is inherent in bonds because their value is a culmination of the present value of the future interest payments and returned principal upon maturity. There is an inverse relationship between interest rates and bond prices.
- Expense matching/immunization. Individual investors use bonds to match a future expected cash need. Institutions use this strategy on a more complex basis, called immunization, which assumes a match of the duration of the bond to the expected cash flow, which can be accomplished by using a zero-coupon bond.
- Long-term planning. Bonds have a steady stream of income, which can be used to fund future expenses for individuals and corporate pension obligations for institutions. This is why financial institutions use long-term bonds for long-term planning.
There are a number of bond ETFs on the market right now that suit a wide range of risk appetites and goals. One way to grab the benefits of bonds could be through a broad ETF such as the iShares Barclays Aggregate Bond Fund (AGG), which is up 1.6% year-to-date.
For more stories on bond ETFs, visit our bond ETF category.
Kevin Grewal contributed to this article.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.