I have been looking at different conservative investment strategies such as 50/50 "interest fund", "global stock fund" and "the permanent portfolio".

As an alternative, I was looking for corporate and government bonds, which I could not find. I did find ETFs that only invest in such bonds.

Since a bond is a bond, I have a hard time seeing a scenario where one loses money on this kind of investment. But since that sounds to good to be true, I'd like to get some feedback.

My understanding is that the ETF buys these bonds and then gets the coupons which it in turn distributes to the owner of the ETF. The actual price of the ETF doesn't move very much and one gets the return in the "distributed coupons".

Feel free to impose restrictions to be able to answer by the way. Some references would also be great.


That's not exactly how bond ETFs work, but it's not far off. The bond coupons are not directly returned to the ETF holder; some of them are retained by the fund to buy new bonds (and to pay fees, of course). How much the fund pays in dividends is up to the fund manager.

If you buy a single bond, you can still "lose money" in the sense that the bond will be worth less than what you paid for it. Yes you are (more or less) guaranteed cash flow, but at relatively low return rates compared to other investments. As interest rates rise, the coupon rates of new bonds with similar risk will be higher, so your both is worth less on paper.

If you kept the single bond over it's entire life, then yes you'd have more money than you started with, but the bonds themselves still go up and down in value.

Now imagine you own 1,000 bonds. They all mature at different times, so when a bond matures you have to buy a new one to take its place, possibly at a higher price or lower interest rate, hence the value of the ETF can go up and down as well.

So yes, bong ETFs are safer that equity ETFs, but there is still the (smaller) possiblity of loss.

  • Thanks for answering. Hence the bond is only worth less given that one tries to sell it before maturity? And keeping it to maturity gives one he whole amout back. – user1 Nov 1 '18 at 16:45
  • Correct. Also note that bond funds to not always keep bonds to maturity, hence the changes in value. – D Stanley Nov 1 '18 at 16:46
  • @D Stanley I have a hard time imagine how the price e.g the value of such an etf(not paying dividens) will go down. It dosnt seam possible to loose money given that it invest in investment grade companies. The only risk is defults which are rather rare thus money should keep growing pretty well at say 2-3%. – user1 Jan 12 at 6:17

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