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Fixed-Income ETFs vs. Individual Bonds


Bond exchange traded funds have been popular for some time, however, the demand for these products is skyrocketing on speculation of rising interest rates. They provide a low-cost, transparent savings strategy, but are also coveted for their flexibility relative to individual bonds.

“I can be more nimble with a portfolio constructed of fixed-income ETFs than with a traditional bond portfolio,” Peyton Studebaker of Caprin Asset Management said in a recent report. “If there’s a credit event, I can shift strategy easily.” [Bond ETFs and Rising Interest Rates]

Bond ETFs gathered about $70 billion in 2012, up 31.4% since 2011, according to BlackRock data. Advisors, money managers and pension funds are all using these tools now so they are prepared for the time when interest rates rise. Once rates rise, bonds lose value and investors will be trying to dump bonds into a market that never fully recovered from weak fundamentals, reports Julie Segal for Institutional Investor. [Muni-Bond ETFs: Migratory Patterns]

Asset managers have realized the advantage of using fixed income ETFs to create a liquid portion of a mutual fund or similar account. This way, investors redemptions remain liquid and the performance drag from cash is limited, says Daniel Gamba of BlackRock’s iShares. Bond ETFs are ideal since they allow quick movements into and out of positions. [Bond ETFs: What Happens When the Fed Goes Home?]

Bond ETFs have also become the retail investors way of hedging liquidity problems in the stock market. Hedge funds, institutional investors and large money managers get priority treatment from Wall Street brokers and dealers since they initiate huge volume transactions. Should there be a market meltdown or emergency, the bigger players get the priority attention. Fixed income ETFs, as well as others, have allowed smaller players to do their own portfolio edits in a seamless manner.

Tisha Guerrero contributed to this article.

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.