Why you’re better off owning high-quality individual bonds rather than bond funds or ETFs when the bond market is going to hell. From Wolf Richter at wolfstreet.com:
Bond ETFs and open-end bond mutual funds sound conservative in marketing materials, but they pack special risks & surprises in a downturn that can entail a catastrophic loss for investors.
Exchange-traded bond funds and bond mutual funds are big business. They’re a lot easier for retail investors to buy and sell than the actual bonds, particularly bond ETFs, which trade on stock markets just like stocks — and can even be day-traded. But this liquidity for investors is precisely the potentially catastrophic problem.
And in this era of rising interest rates and deteriorating credit, bonds already have plenty of other problems.
Corporate America carries record amounts of debt. Part of this debt is in form of bonds (the other part is in form of loans). The amount of bonds outstanding has ballooned over the past five years, even as the credit quality has deteriorated. Now there are $6.1 trillion of investment-grade US-corporate bonds outstanding, according to Moody’s (plus over $1.2 trillion of “junk bonds”). These bonds are everywhere, including in bond ETFs and bond mutual funds, and therefore in retail investors’ portfolios.
