Most people who are familiar with ETFs see them as a better way to create well diversified equity portfolios and give them access to alternative assets like commodities or real estate. They typically don’t consider fixed income ETFs as essential building blocks of a portfolio. That perception is changing, though. As the Wall Street Journal reports, investors are increasingly using ETFs to replace existing holdings in their bond portfolios.
Fixed income ETFs have all the same benefits as equity ETFs – transparency to exactly what you hold, low costs, and tax efficiency. Being able to know what types of bonds you hold each day is especially important right now due to the volatile environment we’re in, and the unusual spreads and pricing relationships we have in some sectors of the fixed income world(municipals yielding more than government bonds!).
The number of fixed income ETFs right now can’t match the sheet number (and redundancies) of bond mutual funds. That’s actually a good thing – – it’s easy to find the ETF that can target the section of the bond market you or your financial advisor are interested in.
