Why invest in bond ETF’s?
It is commonly accepted wisdom a well-diversified portfolio (for all but the most aggressive investor) should have a component invested in bonds and bond ETF’s are one way to achieve that. For the Australian investor the main types of bonds available are federal government backed bonds/debt, state issued bonds/debt and corporate bonds. The main other choice is between domestic or global bonds.
Some of the benefits of bonds include:-
Bond ETFs give investors access to bonds in the same way equity ETFs give investors access to shares. They were first launched in Canada in 2000 and there is hundreds of billions invested in them globally.
Types of Bonds Available
The types of bonds available and their characteristics are shown in the below diagram from the Russell ETF resource centre
When companies want to expand operations or replace existing funding, they often turn to the corporate bond market to borrow money (refer to What are Corporate Bonds? for more information)
In summary bond ETF’s are an essential tool in every investor’s allocation strategy, but they are one of the more difficult complex tools for the part time investor to master. The more time you invest practising researching and understanding bond ETF’s, the less chance there is of you cutting your fingers off while using them!
But get it right and bonds can broaden a risk profile and diversify a portfolio of equities and they offer investors the potential for steady income and attractive yields.