If the goal is to diversify a portfolio and add bond investments in a manner like that described in Intelligent Investor, would owning a bond ETF provide the required diversity or does it need to be actual bonds?

My concern is that in the event of the stock market tanking, a bond ETF might also face liquidity problems and possible loss of value, where as, if you own several actual bonds - then you can hold them to maturity (and provided the company can still pay it back) you'd get your money back.

It seems an ETF allows you to invest in a large range of bonds for a low fee, to invest a small amount into 10+ actual bonds has a high commission cost. So then you lose diversity because all your bond-eggs are in a small basket.

Are bond ETF's considered compatible with direct bond investment for the purposes of diversifying?

  • 1
    RE: "in the event of the stock market tanking, a bond ETF might also face liquidity problems" I think it would take a truly catastrophic event (like a government collapse) for this to happen. More usual stock market drops people tend to rush into bonds, which obviously won't create a liquidity problem for current bond holders.
    – The Photon
    Commented Jun 26, 2015 at 17:42
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    What about a situation where interest rates begin to rise - the value of a bond ETF where bonds are bought and sold - rather than held to maturity, would drop right? Where as, if you owned the bonds yourself and held them to maturity (provided they're repaid) then you retain your investment.
    – ash
    Commented Jun 27, 2015 at 7:00

2 Answers 2


ETFs are just like any other mutual fund; they hold a mix of assets described by their prospectus. If that mix fits your needs for diversification and the costs of buying/selling/holding are low, it's as worth considering as a traditional fund with the same mix.

A bond fund will hold a mixture of bonds. Whether that mix is sufficiently diversified for you, or whether you want a different fund or a mix of funds, is a judgement call.

I want my money to take care of itself for the most part, so most of the bond portion is in a low-fee Total Bond Market Index fund (which tries to match the performance of bonds in general). That could as easily be an ETF, but happens not to be.


As keshlam said, an ETF holds various assets, but the level of diversification depends on the individual ETF. A bond ETF can focus on short term bonds, long term bonds, domestic bonds, foreign bonds, government bonds, corporate bonds, low risk, high risk, or a mixture of any of those.

Vanguard Total International Bond ETF (BNDX) for instance tries to be geographically diverse.

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