As an investment option, bond ETFs have gained a high level of popularity in the recent years due to their high liquidity and low cost. Kavan Choksi points out that as its name suggests, various debt tools and debentures are the underlying for the bond ETF. As a product, such ETFs are quite similar to bond mutual funds as they hold bonds with varying strategies.
Kavan Choksi offers an overview of certain important aspects associated with bond ETFs
Bonds are typically fixed-income assets and are not as liquid as other instruments. The prices of bonds, moreover are not traditionally available in the market. Hence, they are not as transparent as typical ETFs. However, to function like any other ETF, bond ETFs have increased liquidity and transparency in their pricing. Once bond ETFs are structured, they are among the most beneficial and viable investment instruments available today, and hence investors should definitely consider adding them to their portfolio.
Bond ETFs work pretty much like other ETFs, and are tradable in the stock exchange. As a product, they promise low-risk investment and create a steady source of income for discerning investors. Bond funds, however, are intermittent. This means that they are not always readily available in the market for tradition. But with the growing popularity of bond ETFs, more funds like this are likely to become available in the market, thereby eliminating this issue.
Bond ETFs are essentially like ETF funds that track a correlating bond index. These exchange-traded funds invest in varying types of fixed-income generating securities like corporate and government bonds. They have passively managed funds that help retail investors to effectively invest in bond indices in inexpensive ways like ETFs. Bond ETFs are available in multiple bond categories, like convertible, corporate, Treasuries and floating-rate bonds. These investment vehicles can be used for laddering as well. Laddering implies to the technique of combining multiple investment strategies with the goal of creating a steady flow of income. It usually is among the most common techniques adopted by bond investors, as they put their money in bonds with various maturity periods.
In the opinion of Kavan Choksi the increasing popularity of bond ETFs can be largely attributed to the fact that they help general investors to explore the expansive bond market. Like typical ETFs, they trade in the stocks exchange throughout the day. As traditional structured bonds are not readily available in the market, and it is often difficult for investors to find bonds that offer attractive returns, they choose to go for bond ETFs. Such funds not only trade in prominent exchanges, but are also far more liquid than individual bonds and mutual funds. Typically bond market is not as liquid as the stock market. The former has a much wider bid-ask spread that cost investors a good sum of money. However, by purchasing a bond ETF, they leverage the fund company’s ability to get better pricing on its bond purchases. Investors can additionally earn a steady income through monthly interest payments by investing in bond ETFs.