Do you want more control over your investments and to achieve investment returns that can outperform bond funds and ETFs? This webpage compares individual bonds vs. bond funds so you can decide which investments make more sense for you.
One of the biggest advantages of corporate bonds vs. bond funds is that investors can build a bond portfolio that suits their investment objectives and risk tolerance. You can't do this with a mega bond fund that owns thousands of bonds.
Bondsavvy recommendations include both investment grade and high yield corporate bonds, bonds of varying maturity dates, and bonds issued by companies in 16 different industries. Click the "Picks at a Glance" button on the Bondsavvy subscription page for a snapshot of our bond recommendations.
|Corporate Bonds||Bond Funds|
|Higher potential investment returns|
|Superior and frequent financial disclosures|
|Easier to buy & sell|
|Know exactly what you're investing in|
|No recurring fees|
|Pays fixed coupon|
|Returns principal at maturity|
Investors in individual corporate bonds have a key advantage over bond mutual funds and ETFs: the ability to be selective and to find bonds that can appreciate in value and achieve strong investment returns. Many bonds trade at a discount to par value, which is where Bondsavvy focuses its bond investment recommendations.
Since bond funds are so big and have to own so many bonds, they often own bonds priced at significant premiums to par value with little upside opportunity. Many of the largest bond mutual funds and bond ETFs are index funds that invest to follow a market benchmark -- not to maximize returns. Investors deserve better.
Corporate bond issuers file quarterly financials, enabling individual bond investors to compare a bond's price relative to par value, YTM, and credit spread to financial metrics such as leverage ratios. In doing so, investors can determine whether a corporate bond has upside potential and whether it can achieve a strong return.
Such investment analysis is not possible with bond funds, as they trade off an arbitrary net asset value per share and lack any financial metrics for investors to assess whether a bond fund is a compelling value.
Corporate bond issuers file quarterly financial statements with the United States Securities and Exchange Commission (SEC). They make additional filings any time there are material events (Form 8-K) such as an acquisition, divestiture, new financing, or changes in management.
These regulatory filings keep bond investors abreast of what is going on at the issuing company so they can assess whether to add to, hold, or sell corporate bond investments. In addition, since corporate bonds trade as a percentage of their $1,000 face value, investors can quickly begin to assess whether a bond is trading at a compelling value relative to the financial health of the issuing company.
These frequent disclosures are a world away from what bond fund and bond ETF investors receive. These investors typically receive semi-annual reports that disclose information about the fund, such as the fees it charges and the investments held in the fund. Since bond funds typically hold thousands of bonds, there are no financial disclosures related to the operating performance of the companies issuing bonds held by the fund. This makes it impossible to do any financial analysis on bond funds.
In addition, since bond funds trade off net asset value per share, investors cannot assess a bond fund's relative value.
Bond mutual funds are still larger than exchange-traded funds (ETFs), which means most fund investors still can't buy and sell intraday. The corporate bond market is dynamic and always changing. There are earnings announcements, mergers, and news that investors must digest in real time. Executing an individual corporate bond trade takes seconds and you can trade any time during the day. Owning individual corporate bonds enables you to act more quickly -- and precisely -- to events that impact your corporate bond investments.
Since individual bonds trade relative to their $1000 par value, investors are provided a higher level of bond pricing transparency than bond funds, which trade relative to a fund's net asset value. Bond fund and ETF share prices have no benchmark whatsoever, so investors cannot gauge the value at which they are purchasing bond fund and ETF shares.
We typically sell bonds before maturity to maximize investment returns. Knowing how the bond is trading relative to its par value is one of several factors we examine when deciding when to sell bonds we have previously recommended.
When you own individual corporate bonds, you know exactly what you are investing in. You know the issuer, the yield, the maturity date, the price, credit spread, and many other pieces of information that help investors assess a bond's risk and return. You can select the bond issuer's industry and follow Bondsavvy's fixed income investment analysis to assess a bond issuer's financial wherewithal.
Bond funds are essentially derivatives that contain hundreds or thousands of bonds that can change every day. There are very few 'pure play' corporate bond funds. Rather, most bond funds own an assortment of securities, including Treasury bonds, corporate bonds, municipal bonds, common stocks, preferred stocks, and cash.
Typically, six to ten dealers provide live bid-and-offer quotes on online bond trading platforms such as Fidelity.com, E*TRADE, Interactive Brokers, and Vanguard. This helps ensure a competitive market for your corporate bond order.
In addition, investors can compare current bond quotes to recently executed trades on FINRA's Trade Reporting and Compliance Engine (TRACE), which is available on most online brokerages. Our founder Steve Shaw previously presented Investment Transparency in the US Corporate Bond Market for Retail Investors to the SEC, which you can view along with the accompanying Bondsavvy SEC comment letter.
When investors build their bond portfolios, it is crucially important they know the specific securities that are in it to ensure their asset allocation is in line with their investment objectives and risk tolerance. This isn't possible with ever-changing bond funds.
For example, the popular iShares Core U.S. Aggregate Bond ETF (AGG) has often held more
than 10% of its portfolio in cash.
An investment in this bond ETF immediately over-allocates investors to cash. If
you own individual corporate bonds,
you can ensure you are investing in what you want.
When investors own individual corporate bonds, they pay a transaction fee to buy and a transaction fee to sell. On platforms such as Fidelity.com and E*TRADE, this fee is $1 per each bond's $1,000 face value. Therefore, if you own a portfolio of 100 bonds and sell it after three years, your total fees paid would have been $200.
This represents significant savings to bond funds, many of which charge 1% management fees. Had an investor opted to put $100,000 into a bond fund charging 1% during this three-year period, he would have paid $3,000 in fees (+/- depending on investment returns) compared to the $200 paid by the individual corporate bond investor.
In addition to bond fund management fees, there are hidden bond fund fees embedded in bond funds and ETFs that are not disclosed to investors. These trading-related fees are due to the high turnover of many bond funds. These undisclosed fees understate a bond fund investor's true cost of investing and can markedly reduce bond fund investment returns.
The entire premise of fixed income investing is that you receive a fixed coupon payment twice per year and the return of your principal at maturity. It’s why they call it “fixed income.”
Individual bond investors receive contractual coupon payments at specific times during the year. Income investors who count on bond interest payments need this level of security. Variable distribution bond funds don't cut it.
Bond fund holdings are ever changing, as are the distributions they pay investors. Bond funds typically pay dividends every month, but investors will not know how much they are set to receive each month until the payments are made.
The lack of contractual interest payments is one of the reasons we say, “bond funds take the 'fixed' out of fixed income."
Individual bonds are required to repay investors their $1,000 face value at maturity. This key term provides a level of certainty and security of principal that bond fund investors lack.
If you purchase a corporate bond today at a price of 90.00 and a five-year maturity, you know you will receive $1,000 for each bond you own in five years, provided the company does not default.
The same cannot be said for bond funds and bond ETFs. Suppose you purchase Vanguard Total Bond Market Index Fund, VBTLX, at a price of $10.00. Since bond funds do not have maturity dates, investors have no idea what the value of their principal will be in five years. This is why bond funds and bond ETFs are not fixed income investments, as there is nothing fixed about them.
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