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Bond Etf
In 1993 a new type of trading instrument was introduced in stock markets. This trading instrument was called exchange-traded fund. Exchange traded funds (ETF) integrate the positives of mutual funds with that of stocks, to give investors a chance to earn more profits from stock markets, and keep their losses to the minimum, adding liquidity to the new type of security.
The basic concept of ETF is to allow trading of units of pooled investments in specific class or category of assets on stock exchanges. This eliminates a major problem with investments in mutual funds. There are many types of Exchange Traded funds available, such as a gold exchange traded fund that focuses on gold, and oil exchange traded fund that tracks oil and oil stocks. In case of bond Exchange Traded Funds, the underlying assets are bonds.
In a Bond ETF the funds pooled by investors are invested in bonds. Under normal circumstances, people investing in bonds cannot sell them on stock markets. But Bond ETFs can be sold on stock markets. Bonds are generally of larger denominations. Therefore, any individual investor can only go for a limited amount of diversification. If, however, many such investors pool their funds, and invest, then more diversification becomes feasible. Bond ETFs facilitate such diversification. Bonds also block large sums of an individual's capital, for the stipulated number of years, and the holder of these bonds is only entitled to the interest on it within that period. The bondholder may, at the most sell the bond, when the need arises, at the prevailing market rates. Since ETFs are of smaller denomination, a larger section of investor gets access to bond markets through it, and therefore, demand for such ETFs is higher than what the underlying assets can command in bond markets. Even the small investor who didn't have enough funds to invest in bond markets can invest in bonds through bond ETFs, as the investor can buy a single ETF, or in multiples thereof, and can accumulate them over a period of time. Unlike this, investment in any bond can only be done once. Investors in Bond ETF can convert the ETF to the underlying bonds as well.
Like in the mutual funds, a professional manager buys and sells the underlying securities in ETF. Therefore in case of bond ETFs, a qualified professional buys the bonds. If the individual had to do such buying and selling without professional help, it is likely that he or she would not have been aware of better options existing in the market. Individual would have to miss out on opportunity to purchase a bond with higher yield, because of money constraints. A similar constraint is not there in Bond ETF market since Bond ETFs are open-ended schemes. Therefore, bonds that have higher yields can always be added and those with lower yields can be sold. There are, of course, professional fees payable to the professionals managing bond ETF, but these are very nominal when compared to the fees that are paid to mutual fund managers.
Bond ETFs can be sold in stock market like any other share. There are the usual commissions and transaction charges applicable to this unit just like any other stock being traded on stock exchange. However, there are some fundamental differences as well. Companies issue stocks, whereas ETFs are issued by trusts floated by companies, such as banks and other investment companies. Stocks do not represent any underlying security, whereas Bond ETFs represent a bunch of underlying bonds.
Different types of Bond ETFs are available in the market for investor to choose from. These include emerging markets bond ETF, leveraged bond ETF, zero coupon bond ETF, muti sector bond ETF, financial bond ETF, etc. Bond ETFs are also identified as per the bank or investment company that floats such ETFs, for example Barclays Bond ETF, Lehman Bond ETF, ishare Bond ETF, and Fidelity Bond ETF. Investing in Bond ETF is especially worthwhile during a period of economic slowdown in which interest rates are slipping. Investors look to Bond ETFs at such times as safer investment.