Drummond Osborn, president of Osborn Wealth Management, also believes that fixed-maturity bond ETFs offer the best of both individual bonds and actively managed bond funds as the strategies offer the diversification benefits of bond funds with lower interest rate risk associated with individual bond securities.
Investors get “diversification, greater certainty of yield to maturity and a date to mark on the calendar for the return of proceeds. Because the individual bonds which comprise the ETF all mature within the same calendar year, an investor has a greater sense of the amount of principle being returned,” Osborn said in the article.
Additionally, the ETFs are much cheaper than bond mutual funds. For instance, BSCO has a 0.24% expense ratio, BSJM has a 0.42% expense ratio, IBDD has a 0.13% expense ratio and IBCE has a 0.10% expense ratio. In contrast, corporate bond mutual funds have an average 0.86% expense ratio and muni bond funds typically have a 0.93% expense ratio.
However, the ETFs may trade at a premium and show light volume, so investors should be aware they could overpay for the investments. Osborn suggests using limit orders to better control trade executions.
For more information on the fixed-income market, visit our bond ETFs category.
Max Chen contributed to this article.