Montecfo
Give me a museum and I'll fill it. (Picasso) Give me a forum ...
With the recent rise in interest rates, investors have renewed interest in investing in bond funds, ETF's and bonds. This is the thread to discuss the pros and cons of owning bonds indirectly through funds, ETFs etc. versus owning them directly.
While acknowledging there is no single approach is right for everyone this is the place to discuss the advantages and disadvantages of each.
Feel free to recount personal experiences or discuss individual strategies.
I will start with Open-End Bond funds, which are the most common type of bond mutual funds. This is not all advantages or disadvantages, add your own.
Open End Bond Funds:
Advantages:
-Can start small
-Diversified portfolio which reduces risk at first dollar invested
-highly liquid so easy to buy and sell, ready market. Easy to use to rebalance
-Managers of large funds have buying power to minimize transaction costs
-Easy to research fund strategy and holdings
-Investors may choose from a wide range of durations, strategies and types of holdings
Disadvantages:
-In a changing interest rate market, investors may flee funds, which may add selling pressure to bond markets and affect performance
-In a changing interest rate market, investors may rush into funds, making it tough for managers to invest new funds efficiently
-No fixed maturity, so no way to mitigate losses by holding securities to maturity (but Invesco "Bullet Shares" and similar products may address this)
-Fee structure may be a drag on returns (but low cost funds may mitigate this)
-In times of rapid rate changes, fund results may trail market due to fund structure
-if fund holdings are illiquid fund values may be challenged in times of rapid change in underlying bond values
That is a start, probably many more.
Most folks probably make their first bond investments through funds or ETFs, mainly I suspect because of the convenience of doing so.
Did you take this path, and if so what attracted you to bond funds?
While acknowledging there is no single approach is right for everyone this is the place to discuss the advantages and disadvantages of each.
Feel free to recount personal experiences or discuss individual strategies.
I will start with Open-End Bond funds, which are the most common type of bond mutual funds. This is not all advantages or disadvantages, add your own.
Open End Bond Funds:
Advantages:
-Can start small
-Diversified portfolio which reduces risk at first dollar invested
-highly liquid so easy to buy and sell, ready market. Easy to use to rebalance
-Managers of large funds have buying power to minimize transaction costs
-Easy to research fund strategy and holdings
-Investors may choose from a wide range of durations, strategies and types of holdings
Disadvantages:
-In a changing interest rate market, investors may flee funds, which may add selling pressure to bond markets and affect performance
-In a changing interest rate market, investors may rush into funds, making it tough for managers to invest new funds efficiently
-No fixed maturity, so no way to mitigate losses by holding securities to maturity (but Invesco "Bullet Shares" and similar products may address this)
-Fee structure may be a drag on returns (but low cost funds may mitigate this)
-In times of rapid rate changes, fund results may trail market due to fund structure
-if fund holdings are illiquid fund values may be challenged in times of rapid change in underlying bond values
That is a start, probably many more.
Most folks probably make their first bond investments through funds or ETFs, mainly I suspect because of the convenience of doing so.
Did you take this path, and if so what attracted you to bond funds?