3 Advantages of Bond ETFs Over Individual Bonds | ETF Trends

Getting bond exposure doesn’t mean that advisors need to search the vast debt market high and low in search of bonds that fit their clients’ portfolios. Exchange traded funds (ETF) offer key advantages that individual bonds don’t.

For one, there’s diversification. As mentioned, the bond universe is comprised of various types of debt exposure, and one ETF can hold a number of bonds in order to get diversified exposure through one holding.

“Access to a well-diversified portfolio of bonds is one of the key advantages to owning a bond ETF, as is increased simplicity and ease of use,” Vanguard notes in an informational sheet. “Through a single holding in a bond ETF, investors can access hundreds if not thousands of bonds that are diversified among issuers, credit quality and term structure.”

Getting access to bonds doesn’t have to be a costly affair. Vanguard, for example, has bond ETFs that go as low as just three and a half basis points, with the highest not exceeding 20 basis points.

Bond ETFs tend to have greater economies of scale than most individual bond portfolios built by advisors. This size advantage should generally translate into lower execution costs,” Vanguard adds. “The figure on the previous page illustrates this by showing spreads on corporate bond trades by size, which notably decline as trade size increases.”

Lastly, rather than having to dispose a number of individual bonds in the open market, an investor can do just that with one ETF, which makes them liquid. Additionally, information regarding bonds, such as duration and yield, is readily available, which gives bond ETFs that layer of transparency.

An Aggregate Option

Investors who don’t know where to begin to get bond ETF exposure can start with an aggregate option. Vanguard specifically has the Vanguard Total Bond Market Index Fund ETF Shares (BND).

BND seeks the performance of the Bloomberg U.S. Aggregate Float Adjusted Index, which represents a wide spectrum of public, investment-grade, taxable, fixed income securities in the United States, including government, corporate, and international dollar-denominated bonds, as well as mortgage-backed and asset-backed securities, all with maturities of more than one year.

As mentioned, bond investors can use BND as a traditional hedging component when the equities market goes awry. Short-term traders can also use the ETF given its dynamic ability to be bought and sold quickly in the open market.

For more news, information, and strategy, visit the Fixed Income Channel.