Most exchange-traded funds (ETFs) invest in shares and stock markets. However, ETFs have also grown in popularity for investing in bonds (loans to governments — known as ‘gilts’ in the UK — and to companies, called ‘corporate bonds’).
Here are 4 key reasons why investing in bond ETFs can make sense:
Bond ETFs can offer high incomes. ETFs investing in emerging market or other higher risk bonds may pay above 5% a year — for example, iShares JP Morgan EM Local Government Bond ETF (ticker SEML) yields 5.4% (as of 7 September 2022, Bloomberg data).
Some bond ETFs pay income monthly, although quarterly or twice-yearly is more common.
Bond ETFs can help reduce risk in your investment portfolio.
Returns from bonds tend to be more stable than those from shares. And combined in a portfolio with shares, bonds can smooth overall performance.
This diversification benefit reflects that bonds and equities often react differently to market events, with bond prices rising when share prices fall (and vice versa).
Annual charges on bond ETFs can be much lower than those on other types of funds such as unit trusts and open-ended investment companies (‘Oeics’) that invest in bonds.
Bond ETFs charge as little as 0.05% a year — just 50p per £1,000 of investment.
Easy to buy and sell
Choosing and investing in individual bonds can be a challenge.
Governments and companies often have many different bonds with a bewildering variety of interest rates, yields and maturities (when investors are repaid).
And trading costs for individual bonds can be higher than for other investments.
Bond ETFs offer a simple way to invest, giving you a portfolio of up to thousands of bonds in one easy transaction.
InvestEngine’s DIY investment service offers commission-free dealing and a choice of more than 100 bond ETFs. With our Managed investment service, all our Growth portfolios invest in a combination of bond and equity ETFs (plus a small weighting to gold). Our Income portfolios provide regular income direct to your bank account, mainly from bond ETFs.
Capital at risk. The value of your portfolio with InvestEngine can go down as well as up and you may get back less than you invest. ETF costs also apply.
This communication is provided for general information only and should not be construed as advice. If in doubt you may wish to consult a professional adviser for guidance.