Bond market unlike the stock trading is an over the counter market for retail and institutional investors. It lacks liquidity and transparency but they are unique fixed income investments. Bond ETFs are designed to closely track their respective index in cost effective manner. Bonds are mostly held until maturity which limits the availability of the active secondary market to the investors. So it is difficult to ensure that a bond ETF is liquid enough to track an index, a bigger challenge for the corporate bonds than government bonds.
The main distinction between government and non-government Bonds ETFs is that the government bonds are considered less risky while the non-governmental is associated involving a bit of risk. However, the government bonds ETFs are safe if the government has a solid financial status; otherwise, risk of downturn is obvious. So putting faith in government currency without research is not going to turn down any risk. Before investing in bonds ETFs it is necessary for traders to carry out proper research and analysis of the market.
Bond ETFs pay interest through monthly dividends and capital gains are paid in the annual dividend form. Tax efficiency is not a big factor for bond ETFs since capital gains play a minute role in the returns as they do in stocks. Bond ETFs also offer instant diversification to keep the fixed income portfolio up and running after making only one trade. However, there is a management fee charged on the bond ETF and there is less flexibility to create something unique about the investor’s portfolio
The combination of bond’s characteristics and convenience of an ETF resulted in the growth of trade into Bond ETFs. Investment into Bond ETFs crossed the growth of $251 billion dollars in the United States as the ETFs providing easy way with several options; making convenience for investors to trade in Bound ETFs.
The transparency which has been witnessed by large number of investors trading into bond ETFs has given the ETF an attractive publicity. Bond ETFs normally offer minor charges than that of its corresponding ETFs. There are several Bond ETFs traded in the U.S stock exchanges including municipal and treasury bonds ETFs. Well known ETFs include:
- SPDR Lehman High Yield Bond ETF (JNK)
- iShares Lehman TIPS Bond Fund (TIP)
- iShares Lehman 20+ Year Treasury Bond Fund (TLT)
- ProShares UltraShort 20+ Year Treasury Bond ETF (TBT)
- iShares iBoxx US Dollar Investment Grade Corporate Bond Fund (LQD)
- iShares Lehman 1-3 Year Treasury Bond Fund (SHY)
- iShares iBoxx $ High Yield Corporate Bond Fund (HYG)
- 1-30 Treasury Ladder Portfolio ETF (PLW)
- Barclays 0-5 Year TIPS Bond Fund (STIP)
- Grail McDonnell Intermediate Municipal Bond ETF (GMMB)
- High Yield Corporate Bond Portfolio ETF (PHB)
- FactorShares 2X S&P 500 Bull/TBond Bear ETF (FSE)
- FactorShares 2X TBond Bull/S&P 500 Bear ETF (FSA)
- Guggenheim BulletShares 2012 High Yield Corporate Bond ETF (BSJC)
- ProShares UltraShort TIPS ETF (TPS)
- BMO 2013 Corporate Bond Target Maturity ETF (ZXA-TSX).
The fixed income ETF market has provided many options to investors than before. There are currently about 120 fixed income ETFs since last year in US only ranging from munis, corporate bonds, emerging market bonds, government bonds, high yield bonds, inflation protected bonds, international government bonds to preferred/convertible bonds.
