Many portfolios are made up of an allocation of stocks and bonds. When it comes to getting your bond exposure, what’s better: single issues or exchange traded funds (ETFs)?
All portfolios are made of stocks and bonds, no matter how simple or complex they are. Matt Krantz for USA Today reports that stocks and bonds often work well together because stocks give you more potential gain, with more risk, while bonds give you lower returns, but steady income with less risk. [How Bonds Fit Into a Portfolio.]
Another bonus is the generally inverse relationship between stocks and bonds. For example, when investors are nervous and want to cut back on risk, they tend to buy debt issued by the Federal government and sell stocks. So bond prices rise when stock prices fall. [Corporate Bond ETFs Create More Cash Piles.]
Buying bonds directly from the government is totally acceptable and easy, and you can avoid commission fees. In fact, buying Treasuries from the government is a hard deal to beat. You can invest in bonds indirectly by buying shares of a bond ETF, too. As with anything, there are advantages and disadvanteges to this.
Bond ETFs are are simple way to buy a whole slice of the bond market instead of buying a number of individual bonds. You can get the kind of exposure in an ETF that few could afford by striking out on their own.