Posted on 25 September 2011.
A new financial instrument has appeared in the form of bond exchange traded funds. This innovation teams exchange-traded funds with bonds and combines their best qualities. In addition, these new funds add transparency to bond investments, which makes these exchange-traded funds an improvement over the old way of investing in bonds.
Bond exchange traded funds appear to have much in common with mutual funds. They are, in fact, the source of the idea for exchange-traded funds. Exchange-traded funds differ from mutual finds primarily in their ability to be traded on the market exchanges, just as if they were stocks. Bond exchange traded funds share a similar distinction. They have many of the qualities of bonds, but investors can trade them as if they were stocks.
Bond exchange traded funds have done much to enhance the reputation of bonds. These government-issued debt obligations have always been viewed as boring but safe. When the market is unstable, many investors will place a larger-than-normal portion of their cash in bonds. This prevents them from suffering from negative fluctuations in the market but it also prevents them from using those funds to invest in sudden opportunities presented by stocks that are due to break out.
Bond exchange traded funds have changed bonds’ lackluster appearance. These new financial instruments offer investors the safety of bond investments without the accompanying immobility of their money. Bond ETF’s present a new option for investors seeking refuge from a volatile market. They can invest in these funds without getting tied down for long periods of time. If the market makes sudden improvements, as it tends to do, then they can move their money much more easily back into stocks. Bond exchange traded funds also present a transparency that bond investments always lacked in the past.
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