Bond ETFs for income | Vanguard (2024)

FAQs

Why not to invest in bond ETFs? ›

Disadvantages of Investing in Bond ETFs

When interest rates rise, bond prices typically fall, and this can lead to capital losses for investors in bond ETFs. The degree of interest rate risk depends on the duration of the bonds held in the ETF's portfolio.

Most bond funds pay regular monthly income, although the amount may vary with market conditions. This feature can make bond funds an appropriate choice for investors who desire somewhat stable, regular income.

Bond ETFs usually make monthly income payments.

But bond ETFs hold many different issues at once, and at any given time, some bonds in the portfolio may be paying their coupon. As a result, bond ETFs usually make coupon payments monthly, rather than semiannually. The value of this payment can vary from month to month.

Bond ETFs usually pay out interest through a monthly dividend. In most cases, any capital gains are distributed through an annual dividend. For tax purposes, these dividends are treated either as income (taxed at the individual's income rate) or capital gains (taxed at a different rate based on the term held).

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.

Bond ETFs pay dividends on a monthly basis based on the interest income earned on the bonds held in the fund's portfolio.

It's possible to buy bonds directly from the issuer. While that makes sense in some situations, ordinary investors more frequently buy and sell bonds using one of the following methods: Buying individual bonds through a brokerage account: You can buy bonds through most brokers like you would stocks.

Both EE and I savings bonds earn interest monthly. Interest is compounded semiannually, meaning that every 6 months we apply the bond's interest rate to a new principal value.

Buying individual bonds can provide increased control and transparency, but typically requires a greater commitment of time and financial resources. Investing in bond funds can make it easier to achieve broad diversification with a lower dollar commitment, but offers less control.

How many bond ETFs should I own? ›

Experts agree that for most personal investors, a portfolio comprising 5 to 10 ETFs is perfect in terms of diversification.

Almost all bond ETFs are open-ended ETFs, though 17 are exchange-traded notes. Either way, you aren't taxed until you sell your shares. When you do, you owe capital gains tax on whatever profit you make. If you hold your shares for more than a year, you can use the lower long-term capital gains tax rate of 20 percent.

Their daily transparency and the ease of tracking an index can be particularly appealing for those who value cost efficiency and operational simplicity. However, like bond funds, bond ETFs are also subject to market risk, including changes in interest rates and credit risk.

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.

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.

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.

Assuming All Bonds Are Guaranteed

However, if a corporate issuer with a low credit rating falls into bankruptcy or other financial distress, you may only get a portion of your money back, or none at all. This is known as credit risk.

The greatest risk for investors is market risk. If the underlying index that an ETF tracks drops in value by 30% due to unfavorable market price movements, the value of the ETF will drop as well.