In 2010, iShares broke new ground when it rolled out six defined-maturity municipal-bond ETFs.
WSJ: Bond ETFs for Investors Worried About Rising Interest Rates
Actively managed bond ETFs last year outshone actively managed stock ETFs in attracting new assets.
Problems occur with corporate bond ETFs in a fast-moving market because the arbitrage mechanism starts breaking down.
Although I generally prefer bond funds, I do use bond ETFs at times.
Until then, avoiding these free-falling bond ETFs, may be the most prudent approach.
Lately, bond ETFs have received a lot of attention for tracking widely from the indexes they are supposed to follow.
Bond ETFs pay out interest through a monthly dividend, while any capital gains are paid out through an annual dividend.
Unlike the Guggenheim offerings, which are broadly diversified, the iShares corporate-bond ETFs avoid debt issued by banks and other financial firms.
WSJ: Bond ETFs for Investors Worried About Rising Interest Rates
And some of the newer bond ETFs (like PIMCO Total Return ETF, BOND) show signs of being real competitors for bond funds down the road.
In fact, he has invested in some bond ETFs, which because of the market downturn have given equity-like returns despite being in the fixed-income category.
However, I believe corporate bonds should be delivered using a traditional open-ended mutual fund because it avoids the discounts and premiums that develop in bond ETFs.
Bonds are more expensive to trade than stocks, so most bond ETFs typically trade slightly above NAV to compensate ETF market makers for these added trading costs.
The NOB spread now appears to have bottomed and the technical action of two key bond ETFs is also consistent with a further decline in yields.
In December, when chatter heated up again about reducing the tax benefit of munis, there was a large move to the downside in muni bond ETFs.
FORBES: Muni Bond Group To Washington: Hands Off Our Tax Exemption
The suppliers of bond ETFs get around the liquidity problem by using representative sampling, which simply means tracking only a sufficient number of bonds to represent an index.
Here, traders will have to be patient for strength below the 200-day, similar to the short-term overbought conditions in bond ETFs from a year ago in 2011.
That said, I also feel pretty confident suggesting that if you are looking at fixed-income, it would be prudent to consider individual bonds over bond funds and bond ETFs.
However, the tax efficiency of bond ETFs is not a big factor, because capital gains do not play as big of a part in bond returns as they do in stock returns.
In a down market, these same bond ETFs may trade below NAV, sometimes substantially, when there are more sellers than buyers and market makers are unwilling to bring the ETFs back to NAV.
While similar to other ETFs, bond ETFs are unique in the world of fixed-income because, as they are traded on stock exchanges, the current and historical prices of bond ETFs are available to all investors.
Municipal bond ETFs are nothing new. iShares, SPDR and PowerShares all offer municipal bond ETFs that either focus on particular states, like the iShares California AMT-Free Municipal Bond Fund ETF ( CMF), or provide national exposure to munis, like the Insured National Municipal Bond Portfolio ETF ( PZA) from PowerShares.
The cure for such over exposure is a simple one: whether they are bond mutual funds, ETFs or separate bonds, sell some of those bond investments!
If you believe the U.S. economic recovery remains on track, high yield bond funds and ETFs may be good vehicles for acting on your conviction.
It is hard for active bond management to compete with bond index funds and ETFs.
Yet inflows into checking and savings accounts outstripped inflows into stock and bond mutual funds and ETFs in every single month of 2011, including in tax season.
With the initial run of the Pimco Total Return ETF ( BOND), active ETFs and their managers may need to start thinking about the challenges that success could pose to the ETF structure.
Given the liquidity of government bonds, tracking errors will be less of a problem with ETFs that represent government bond indices.
Some ETFs like Vanguard Total Bond ETF ( BND), are relatively safe.
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