3 ms·

> before you buy a bond ETF recognize that it’s not the same as buying a bond. With a bond index you can lose money at mark-to-market that you’d only recoup aft

> before you buy a bond ETF recognize that it’s not the same as buying a bond. With a bond index you can lose money at mark-to-market that you’d only recoup after decades of interest or if we want back down to lower rates. Sounds super interesting but could you give a layman's explanation please?

phkahler 4y ago
Bonds pay a fixed return. You buy it and there is no question what the return is for the term of the bond. Bond funds on the other hand, buy and sell bonds in an attempt to do better but there is also risk of doing worse. You buy a $1000 bond that pays 2 percent for 5 years. Great, that's what you get. A fund buys the same bond and then interest rates rise, so they sell the bond at a slight loss (vs $1000) so they can invest in something with a better return. It becomes a bit of a game and can lose or gain vs the fixed return of buying and holding actual bonds.
compumike 4y ago
This article may be helpful: https://www.bogleheads.org/wiki/Individual_bonds_vs_a_bond_fund https://www.bogleheads.org/wiki/Individual_bonds_vs_a_bond_f... Specifically: “Thus, the distinction between a non-rolling ladder (designed to meet date-certain future liabilities) and a rolling ladder (which essentially represents a personal bond fund) is much more important than the difference between a rolling ladder and a bond fund.” A one-off individual bond purchase, held to maturity, would be the simplest example of a “non-rolling ladder”. But even then, the individual bond if marked-to-market (or if you needed to liquidate it before maturity date) would have fluctuating market price. It’s only the intent to hold it to maturity that gives one the ability to choose to ignore the intermediate market price. And if you’re reinvesting it into more bonds (a “rolling ladder”) then you do have to care about market prices at reinvestment time regardless.
nathanasmith 4y ago
You buy a bond from the government for $1000 paying 5% interest and, as long as you keep the bond, you're guaranteed to get that interest money and get your $1000 back when the bond matures. A bond fund has no "maturation date" therefore the only money you get back from it is the current market rate of the bonds in it which could easily go up or down.

phkahler 4y ago

Bonds pay a fixed return. You buy it and there is no question what the return is for the term of the bond. Bond funds on the other hand, buy and sell bonds in an attempt to do better but there is also risk of doing worse. You buy a $1000 bond that pays 2 percent for 5 years. Great, that's what you get. A fund buys the same bond and then interest rates rise, so they sell the bond at a slight loss (vs $1000) so they can invest in something with a better return. It becomes a bit of a game and can lose or gain vs the fixed return of buying and holding actual bonds.

compumike 4y ago

This article may be helpful: https://www.bogleheads.org/wiki/Individual_bonds_vs_a_bond_fund https://www.bogleheads.org/wiki/Individual_bonds_vs_a_bond_f... Specifically: “Thus, the distinction between a non-rolling ladder (designed to meet date-certain future liabilities) and a rolling ladder (which essentially represents a personal bond fund) is much more important than the difference between a rolling ladder and a bond fund.” A one-off individual bond purchase, held to maturity, would be the simplest example of a “non-rolling ladder”. But even then, the individual bond if marked-to-market (or if you needed to liquidate it before maturity date) would have fluctuating market price. It’s only the intent to hold it to maturity that gives one the ability to choose to ignore the intermediate market price. And if you’re reinvesting it into more bonds (a “rolling ladder”) then you do have to care about market prices at reinvestment time regardless.

nathanasmith 4y ago

You buy a bond from the government for $1000 paying 5% interest and, as long as you keep the bond, you're guaranteed to get that interest money and get your $1000 back when the bond matures. A bond fund has no "maturation date" therefore the only money you get back from it is the current market rate of the bonds in it which could easily go up or down.