Why are more people investing in bond ETFs than individual bonds? Bond markets are evolving every day and with the evolvement, many investors are slowly moving away from investing in individual bonds to embracing ETFs. One of the reasons for the switch is the marketuncertainty, which has seen many individual bonds fluctuating in prices. Many of these investors are opting for ETFs because they have more benefits over individual bonds. Some of the main reasons why ETFs are slowly gaining popularity over individual bonds are becauseof their diversity, simplicity and lower costs.
Before the launching of ETF in 2002, it was not easy to access the fixed income market. Becauseof the high cost of individual bonds, only big investors and institutions could buy them. This left the smaller investors to put their focus on investing in actively traded mutual funds, which was both costly and had the holdings uncertainty. This however changed from 2002 when four ETFslaunched. The four, IET, LQD, SHY and TLT allowed investors to own bonds in a more transparent and cheaper way.
Benefits of Investing in ETFs
Many people invest in ETFs because of the benefits. Some of these are;
- Offers diversification. An ETF gives the investor great exposure to different equities, styles and market segments.
- You can trade an ETF like a stock. You can purchase ETFs as margins, trade futures, options and trade them at different prices updated throughout the day. By using the ticker symbol, you can look up the daily price of the ETFs and compare it to its commodity or indexed sector.
- Lower expenses. One of the things that make ETFs a favourite with many investors is its lower expense ratios as compared to other funds. Costs that drive up mutual funds like shareholder accounting fees, marketing fees, load fees, management fees and others are not in ETFs.
Are There any Risks Involved in ETF investment?
A year after the launch of the four, AGGT came into the market exposing more investors to bigger markets like Aggregate Bond Index and Bloomberg Barclays US. As the senior director of top ETF research for CFRA, Todd Rosenbruh said, bond ETFs democratised the bond market making it more accessible to investors. He further went on to say that investors were now able to target their preferred approach to either take on a credit risk or reduce their credit risk. Rosenbruh said that investors were now more aware of the rising interest rates and knew what to do in order to benefit.
Though ETFs are now easier to access more than they were before, they come with a few risks. The first thing any investor needs to note is the fund’s investment objectives. Investors also need to learn about the charges, the expenses accrued before investing and all the risk factorsinvolved. If you are an investor and you have no one to walk you through the risks and charges, you can read the prospectuses before you invest. You can also read the same here.
Some of the expected risks are
- Possible loss of the principal investment amount. ETF prices are volatile and the ETFs that you initially invest in may perform very badly. You should either know that the principal amount you invest in might go down or go up. Do not go with the past performance of the ETF because it is not a true indication of the future.
- No control over investments. The discretion to control your investments is not in your hands but in the hands of the investment manager. The manager is an appointee of an investment exchange traded find provider, so you as the investor cannot really know what is happening to your investment until you get your results.
- Changes in tax. ETF tax treatment is subject to change and tis may affect your investment. Returns from ETFsmay be subject to income tax in some cases that could put you in a tax liability situation. To find out more about the status of your tax obligations and how they could affect your ETFinvestment, you should consult a qualified tax advisor to tell you what to expect and what to do to ease your liability.
- Currency risks. Investors could also face a currency risk if the investments are traded in a currency that is different to the denominational currency.
Conclusion
ETF exposes many investors to more sectors where they could make more gains. ETFs are like stocks but with broader choices and investments, they offer more advantages to many other managed mutual funds, some of which are diversification and lower costs of investing. Though more and more people are investing in ETF, it is not without its risks. It is importance to find out the risks involved before investing so you can be completely sure you want to go ahead.