Bond ETF 101: Not As Simple As They Seem | ETF Trends

There are alternatives to just plain old bonds, and exchange traded funds (ETFs) holding them are available to those who search for the right one.

Bond ETFs are a great alternative to a simple bond investment, and the number of choices of types of bond funds are endless. Matt Krantz for USA Today reports that in many cases, you can get attractive yields from companies with decent credit quality. In addition, as a bond holder you have a senior claim to the company’s assets in case things get ugly financially. [The Latest Bond ETF from Schwab.]

For higher yields on your bond investment, junk bonds can be rewarding, if you can carry the risk. Debt issued companies that sell bonds are less risky, but have a higher credit quality. Corporate bond ETFs are also a choice, and they offer income streams from their dividends. [Are Junk Bonds Better in an ETF Bundle?]

There are some downers related to bond ETF investing, however, but if you are aware of them, you may avoid it altogether. Finweb explains some of the lower points:

  • As with other ETFs, the biggest tax advantage of bond ETFs is that while you do have to pay a capital gains tax on profits earned from them, you only have to do it once the entire ETF is sold. Certain bonds are taxed differently, so be aware of the ramifications.
  • International Bond ETFs are ETFs that are made up of bonds issued by foreign governments. The issuing governments have the right to tax those bonds. The situation is further complicated by the fact that different countries will levy different taxes. Before going in, figure out the bond related tax-laws of the country of origin.
  • Municipal bond ETFs are ETFs that are made up of municipal bonds that are issued by towns, cities, counties and other municipal objects in order to generate capital. Municipal Bond ETFs are completely tax-free. The only exception to this rule is when the profits you earn get large enough to be taxed under the Alternate Minimum Tax (AMT).

For more stories about bond ETFs, visit our Bond ETF category.

Tisha Guerrero contributed to this category.

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.