Accessing the bond market can be challenging, especially for individual investors—making fixed income ETFs an effective vehicle to achieve efficient bond exposure.
Traditionally, investors seeking exposure to bond markets had to gain access through actively managed mutual funds—which typically means higher costs and potentially less diversification
Fixed income ETFs combine the best elements of the ETF structure with the benefits of fixed income exposure, giving investors affordable and broad access to the bond market.
Fixed income ETFs have come a long way since they were launched in 2002 and investors have become much more familiar with the different benefits they provide however, there are still some misconceptions
Investors must do their due diligence and determine; what is a myth and what is reality:
1.) Myth #1: Investors do not know what they are buying
a. ETF holdings are displayed daily - providing investors with a window of intraday, real time pricing transparency.Unlike mutual funds which typically display holdings anywhere from a 30-60 day lag.
2.) Myth #2: “Promised” Liquidity
a. Due to the nature of bond trading, bonds are inherently less liquid. Although the liquidity of an ETF is driven by its underlying securities, secondary market trading of the ETF’s shares provides another layer of liquidity, enhancing the overall liquidity profile for investors. In many instances, investors exchange shares of the ETF itself, and there are no transactions in the underlying bonds.
3.) Myth #3: Liquidity will diminish in times of stress
a. There is a misunderstanding that during periods of market sell-offs, investors will face diminished liquidity and wider spreads. However, fixed income ETFs have been known to historically experience enhanced liquidity during periods of heightened volatility.
4.) Myth #4: Lack of Liquidity in “Worst Case Scenarios”
a. There is a misconception that the large premiums and discounts that fixed income ETFs can experience, are a testament to their lack of liquidity.
b. However, an ETF’s market price may actually be a better reflection of the real-time value of the underlying bond portfolio The ETF’s secondary market price may be acting as a price discovery vehicle for its underlying portfolio of bonds. ETF sponsors generally rely on a third-party provider to calculate NAV, but due to the slow and sporadic nature of bond trading, sometimes it takes a bit for the NAV to catch up.
Fixed income ETFs provide a degree of flexibility for investors that is not typical in bond markets. Low cost, transparency, and diversification have broad appeal to investors seeking a long-term growth strategy. Combine that with the additional layer of liquidity, fixed income ETFs can be a great investment vehicle for individuals and financial advisors who are looking to tap into the bond market, efficiently and effectively.
So before ruling out fixed income ETFs, ask yourself: Is this a myth or, is it reality?
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