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 provide the diversification benefits of bond funds with lower interest rate risk associated with individual bond securities.
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 comparison, diversified bond funds have no set maturity date and constantly sell holdings set to mature and buy longer dated bonds to achieve their target strategy. Consequently, these diversified bond funds come with duration risk where funds with longer durations could see prices significantly decline if interest rates were to rise.
However, the maturity-date 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 fixed-income assets, visit our bond ETFs category.
Max Chen contributed to this article.