Bond ETFs fall after fresh inflation data (2024)

FAQs

Are bond ETFs good for inflation? ›

Therefore, when inflation is high and interest rates are rising, long-term bonds, and the ETFs that invest in them, can fall in price faster and further compared to short-term fixed income securities.

"Short-term bond ETFs have compelling yields, which will do well while short-term rates remain high," says Dave Francis, investment advisor and principal at Bartlett Wealth Management. "They also have the benefit of providing higher rates, even if the Federal Reserve begins reducing the overnight rates."

Bond ETFs can offer several potential advantages for investors in 2024, as many analysts expect the economy to slow or enter a recession, which could lead to price appreciation.

Prices will rally when interest rates drop and drop when interest rates increase. The higher the duration, the more ETF prices may move. Short-Term Bond ETFs and Money Market Funds have a very low duration. Low risk, means lower volatility.

Interest rate changes are the primary culprit when bond exchange-traded funds (ETFs) lose value. As interest rates rise, the prices of existing bonds fall, which impacts the value of the ETFs holding these assets.

Inflation is a bond's worst enemy. Inflation erodes the purchasing power of a bond's future cash flows. Typically, bonds are fixed-rate investments. If inflation is increasing (or rising prices), the return on a bond is reduced in real terms, meaning adjusted for inflation.

When interest rates decrease, bond prices increase, and when interest rates rise, bond prices decline. Both long-term and short-term bonds are impacted by interest rate changes, but long-term bonds see a greater impact. Rising interest rates are one of the ways you can lose money investing in bonds.

In other words, bond ETFs are at risk if the borrower defaults as this means they may not pay the entire amount of the bond back. While there is no debt to an equity ETF, the underlying companies can still incur losses and lose value.

The table on the right shows that bond prices often recover within 8 to 12 months. Unnerved investors that are selling their bond funds risk missing out when bond returns recover. It is important to acknowledge that some of those strong recoveries were helped by bond yields that were higher than they are today.

For many investors, investing in the right bond funds can be a better option than holding a portfolio of individual bonds. Bond ETFs can provide better diversification — often for a lower cost — can offer higher liquidity, and can be easier to implement.

What is the average return of a bond ETF? ›

Nearly all leveraged ETFs come with a prominent warning in their prospectus: they are not designed for long-term holding. The combination of leverage, market volatility, and an unfavorable sequence of returns can lead to disastrous outcomes.

What causes bond prices to fall? Bond prices move in inverse fashion to interest rates, reflecting an important bond investing consideration known as interest rate risk. If bond yields decline, the value of bonds already on the market move higher. If bond yields rise, existing bonds lose value.

Answer: Now may be the perfect time to invest in bonds. Yields are at levels you could only dream of 15 years ago, so you'd be locking in substantial, regular income. And, of course, bonds act as a diversifier to your stock portfolio.

At maturity, these mutual and exchange-traded funds (ETFs) liquidate their portfolios and distribute their assets to their shareholders. There is no stated par value as with a bond. Rather, what is distributed is an amount equal to the value of assets owned by each share of the fund.

For many investors, investing in the right bond funds can be a better option than holding a portfolio of individual bonds. Bond ETFs can provide better diversification — often for a lower cost — can offer higher liquidity, and can be easier to implement.

In fact, I-bonds often outperform many of the highest-performing stocks as well during inflationary periods. These Treasury-issued bonds generate high returns without all the risks of those other high-yielding investments because they're backed by the U.S. government.

This means that when interest rates go up, bond prices go down and when interest rates go down, bond prices go up. Alternatively, if prevailing interest rates are increasing, older bonds become less valuable because their coupon payments are now lower than those of new bonds being offered in the market.