Bond ETFs vs Individual Bonds: Which Makes More Sense?

Bond ETFs vs Individual Bonds

Most of the time, bonds are the best way to make a steady income or lower the risk in a portfolio. But buyers today have to decide on a new version of an old question: Should they buy bond ETFs vs. individual bonds? Both can be useful in money, but one may be better based on your goals. Let's make this essential choice easier to understand, more useful, and more fun.

Feature	Bond ETFs	Individual Bonds
Liquidity	Can be traded anytime during market hours	Less liquid, harder to sell
Income Predictability	Varies with fund manager's decisions	Steady and predictable
Price Volatility	Can fluctuate based on market sentiment	Prices stable until maturity
Diversification	Highly diversified across sectors	Hard to diversify without large portfolio
Fees	Low cost ratios, usually < 0.20%	Hidden markups or transaction fees

Understanding The Basics

What Are Individual Bonds?

A bond is a loan you give to a business or the government. They offer to pay you interest regularly, usually every six months, and to return the full amount of your investment (the capital) when the bond matures.

There Are Different Flavors:

Treasuries: US government-issued securities. Very safe.
Corporate Bonds: Issued by companies. Higher risk means a possible higher return.
Municipal Bonds: Issued by states and cities. Often not taxed, especially for businesses in the area.

The best thing about personal bonds? Being able to guess. You know what you're getting if the provider doesn't go bankrupt.

What Are Bond ETFs?

An exchange-traded fund (ETF) that holds bonds is like a box with dozens or hundreds of different bonds. Like a piece of stock, it can be bought or sold on the stock market. The ETF usually pays interest monthly, and its price can increase or decrease during trading. Bond ETFs vs Individual Bonds let you diversify immediately and easily enter the bond market without picking individual bonds.

Key Differences Between Bond ETFs vs Individual Bonds

Liquidity And Trading Flexibility

This is a win for bond ETFs. During market hours, they can be bought and sold at any time. This makes them a useful tool for busy buyers. Bond ETFs vs. individual bonds between people? Not really. Their market has less clarity, and prices can change a lot established on who you purchase from.

Income Predictability

Individual bonds are a great choice if you want a steady income stream. It's clear how much interest you'll get and when you'll get your money back. Bond ETFs don't get old. The fund manager always buys and sells bonds to keep the ETF in line with its goal index. And you won't get your capital back at a certain date. Your income will depend on the loan.

Price Volatility And Market Exposure

Yields and bond prices change together. Bond prices tend to drop when rates rise. When you trade bond ETFs vs Individual Bonds, your exchange screen shows you this price change immediately. Individual bonds don't have daily price changes, so you can hold them until they mature.

Diversification

Again, bond ETFs win. Most ETFs hold a range of industries, periods, and producers of bonds. You'd need a big collection and a lot of time to handle individual bonds to do that.

Costs And Fees

If you buy individual bonds, there may be a markup, a secret fee built into the price. Bond ETFs vs. individual bonds charge a cost ratio that is usually less than 0.20%. Both choices have costs, but ETFs usually make fees more clear.

Pros And Cons Of Bond ETFs vs Individual Bonds

Individual Bonds

Pros:

Predictable cash flow
Principal returned at maturity
Less vulnerable to short-term market movements if held until maturity.

Cons:

It is more difficult to diversify without a huge portfolio.
Difficult to sell and less liquid
Pricing might be unclear.

Bond ETFs

Pros:

Easy to sell and a lot of money
Diverse in design
Low investment amount

Cons:

With no maturity date, your investment value swings.
Income can vary
Subject to market pricing and sentiment.

Suitability: Matching To Investor Profiles

Conservative Investors Seeking Income

Individual bonds, especially those with laddered terms, might be your best friend if you're retired or almost retired and want a steady income stream. They give you power over your time and cash flow.

Bond ETFs vs Individual Bonds: Which Makes More Sense?