Investing in ETFs For Dummies by Russell Wild

Author:Russell Wild [Wild, Russell]
Language: eng
Format: epub
ISBN: 9781394201099
Publisher: Wiley
Published: 2023-07-28T00:00:00+00:00

Finding strength in numbers

To be honest, diversification in bonds, though important, isn’t quite as crucial as diversification in stocks. If you own high-quality U.S. government bonds (as long as they aren’t terribly long term) and you own a bevy of bonds from the most financially secure corporations, you’re very unlikely to lose a whole lot of your principal, as you can with any stock. But diversification offers more benefits than just protecting principal. There’s also much to be said for smoothing out returns and moderating risk.

Bond returns from one category of bonds to another can vary greatly, especially in the short run. In 2008, for example, high-yield corporate bonds, as represented by the SPDR Barclays Capital High Yield Bond ETF (ticker symbol: JNK), saw a return of –24.7 percent. That same year, U.S. Treasury bonds, as represented by the iShares Barclays 7–10 Year Treasury Bond ETF (ticker symbol: IEF), returned 17.9 percent. But the very next year, 2009, was a terrible year for Treasurys; IEF sagged –6.56 percent and JNK shot up 37.65 percent.

By owning a handful of bond funds, you can effectively diversify across the map. You can have Treasurys of varying maturities, corporate bonds of varying creditworthiness, international bonds of varying continents and currencies, and municipal bonds from across the nation. As you see throughout the rest of this chapter, I urge investors primarily to seek safety in bonds. If you’re looking for high returns, go to stocks. The purpose of bonds, as far as I’m concerned, is to provide ballast to a portfolio.

The purposes served by bond funds are to make your bond investing easy, help you to diversify, and keep your costs low. Just as in the world of stock funds, all bond funds are not created equal. Some Treasury funds are better than others. Some corporate bond funds are better than others. Ditto for funds holding municipal bonds and foreign bonds.

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