Monday, April 25, 2011

Bond ETF Review For Bullish and Bearish Investors

Its asset under management was 12, 6 $ billions on July 31, 2010. It reproduces the Lehman Aggregate Bond Index considered to be the very best total market bond index. Its management expense ratio (MER) is 0, 24%. In comparison, the average bond funds tracking this index has a whopping 0, 94% MER. Conclusion

And the winner is? ETFs. Globally, ETFs are less expensive, much more efficient, offers much better returns, are much more transparent, provide a broader option for diversification purposes and create monthly income (as well as funds). The only downside will be the automatic reinvestment of distribution. The major ETF players like iShares, PowerShares, Vanguard to name a couple of, went following the mutual fund firms to win the war of asset under management of this vast bond market. Are ETFs worth it? Fast answer: YES. Now let's see why.

Management fees

Its asset under management was 12, 6 $ billions on July 31, 2010. It reproduces the Lehman Aggregate Bond Index regarded as to be the best total market bond index. Its management expense ratio (MER) is 0, 24%. In comparison, the average bond funds tracking this index has a whopping 0, 94% MER. Such a difference in management fees (0, 70%) is enormous particularly when historic low rates make the evening news. It is a reality; the low level of interest rates on government and municipal bonds do not leave a lot to the investor. Because most ETFs offer a broad diversification with MER's as low as 0, 20%, the advantage clearly goes to ETFs in this regard.

Option of sector

The bond market is much more than twice as big as the stock market. Such a vast marketplace leaves choosing the right bond with the right maturity and credit high quality a tough job.
? Real return

? International

Whilst most bond funds cover these sectors, ETFs provide an even much more complete set. Mutual funds do not provide as much depth whilst their products generally attempt to follow main bond indexes.

Active or passive management?

Research has shown poor added value for active management of bonds. Whilst couple of managers might be able to create couple of basis points more than their index counterparts, the management fees of bond funds will rapidly annihilate this benefit. So it is similar to UBT but this one is designed to go up 3% if TLT goes up 1% on a given day.

But I'm bearish you might say: What About The Short Bond ETFs?

The basic inverse (short) bond ETF is TBF - ProShares Short 20+ Year Treasury ETF. This etf is designed to offer -100% (inverse) correlation to the every day performance of the Barclays Capital 20+ Year U.S. It's is a broad, tax-free bond fund that costs 0.25% annually.

Another great investment could be the short-maturity corporate and municipal Bond ETFs like the Vanguard Short-Term Bond Fund (BSV), or the SPDR Barclays Aggregate Bond ETF (LAG) which will be the smallest in the category nevertheless is also the most inexpensive to purchase.

Whilst Bond ETF might not double your money overnight they are a great low-risk alternative to money correct now. I suggest you get fully invested since it is much better to put your cash to work than to let it merely track the rate of inflation, which we all know gets you no-where fast.

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