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I know that the bonds are higher risk investment so I'd like to compare the bond funds/ETFs with the market sweep offered by account to decide on proper mix. However I'm confused of how to read ETF prospect about expected return - what number is the expected return (i.e. barring the change in interest rate, default etc.) in dividends (assuming no change in interest rates I guess)?

  • This seems like kind of a complex "question". You may want to focus it more. – Five Bagger Dec 26 '14 at 16:51
  • @TylerDurden I tried to focus it more but it's possible I don't know enough to ask the right questions. – User Dec 27 '14 at 7:07
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Bonds might not be simple, but in general there are only a few variables that need to be understood: bid, coupon (interest) rate, maturity, and yield. Bond tables clearly lay those out, and if you're talking about government bonds a lot of things (like convertibles) don't apply (although default is still a concern).

This might be overly simplistic, but I view ETF's primarily as an easy way to bring somewhat esoteric instruments (like grain futures) into the easily available markets of Nasdaq and the NYSE. That they got "enhanced" with leveraged funds and the such is interesting, but perhaps not the original intent of the instrument.

Complicating your situation a bit more is the fee that gets tacked onto the ETF. Even Vanguard government bond funds hang out north of 0.1%. That's not huge, but it's not particularly appealing either considering that (unlike rounding up live cattle futures), it's not that much work to buy US government bonds, so the expense might not seem worth it to someone who's comfortable purchasing the securities directly.

I'd be interested to see someone else's view on this, but in general I'd say that if you know what you want and know how to buy it, the government bond ETF becomes a lot less relevant as the liquidity offered (including the actual "ease of transacting") seem to to be the biggest factors in favor. From Investopedia's description:

The bond ETF is an exciting new addition to the bond market, offering an excellent alternative to self-directed investors who, looking for ease of trading and increased price transparency, want to practice indexing or active bond trading. However, bond ETFs are suitable for particular strategies. If, for instance, you are looking to create a specific income stream, bond ETFs may not be for you. Be sure to compare your alternatives before investing.

  • +1 though added bonus of ETFs though is diversification. I presume that bond ETF has a wide range of maturity dates in them so $100 or so do create effectively a bond ladder. On the other hand in case of manually created bond ladder you need to invest more. That may be a problem for accounts with limited resources - for example using recommended on Investopedia minimum for bond ladder you need to contribute for 2-6 years to IRA/HSA full amount and spend all of it on bonds (probably unwise split of stocks/bonds at the beginning). – User Jan 1 '15 at 21:21
  • @User I just think, boiled down, if you're at that level where you're comparing yields and time horizons it's going to be hard to justify the fee. I think bond ETFs sit more correctly with someone who is sitting on a retail brokerage account and can pick from (a) stocks (b) a 0.0000001% interest rate cash account and (c) bond ETFs. Not a lot of thinking involved, quick to do, easy to get out of. By the sound of your analysis you're more sophisticated and don't get much of the abstraction offered by the ETF instrument. – Eric Jan 1 '15 at 21:29

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