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Friday, February 18, 2011

Bond ETFs Are Good…If You Understand Them

If you’ve eyed the current 4.57% yield on the 30-year Treasury bond, you might be tempted to buy. But hold on: chasing yields in your exchange traded funds (ETFs) can hurt you if you’re not careful.
In hopes of getting halfway decent yields, millions of investors have gone far out on the curve. However, bonds and bond ETFs aren’t insured by the Federal Deposit Insurance Corporation (FDIC), so you’re at risk of losing principal when the Federal Reserve raises rates.

Short-term bond ETFs don’t have the most appealing yields – 3-month bonds are 0.12%; 3-year bonds are 1% – but they will be less impacted when rates jump.

Constance Gustke at Bankrate drilled down into a few of the pros and cons when it comes to bond ETFs:
  • Pro: They’re liquid – you can buy and sell them anytime markets are open.
  • Pro: There are so many options – any type of bond is now available in ETF form, and there’s about to be more soon: BulletShares is launching a suite of BulletShares High Yield Corporate Bond ETFs on Thursday.
  • Con: You can lose money. Bonds are considered “safe” relative to other investments, but that doesn’t mean they won’t hurt you.
  • Con: There’s risk. It ranges from safe (Treasuries) to super risky (junk bonds). 

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1 comment:

  1. Bond exchange traded funds are an excellent way to invest in fixed income securities.