Fixed Income ETF: Tap Into the Bond Market

A fixed income ETF provides a way to access arguably more stable and reliable bond market with relative ease. As an ETF as the investment vehicle also brings with it diversification as each fund will typically hold dozens if not hundreds of different bonds at any given time. Prior to such an option, the average investor would be unable to manage such a portfolio and it would be incredibly expensive to do so because of transaction fees.

Fixed income ETFs may also be of interest to those that are looking to limit volatility both over the short or long term. For those that are approaching retirement, volatility is a key factor as there is less time to recover from a dip as compared to younger investors.

Another use for such ETFs is as way to maintain liquidity of your assets similar to using a money market account while also taking advantage of a greater return. Unlike individual bonds that require you to hold them for a specific duration, fixed income ETFs allow you to buy and sell when it suits. Do watch out for transaction fees!

As is always the case, no single ETF is the ideal answer for all people at all times. Firstly, the investor has to do a bit of research to determine if a short or long term fund is the right choice for their needs. Before jumping into the fixed income funds, it is up to the investor to perform the necessary due diligence particularly by reviewing the prospectus.

There are a number of options in the fixed income category and numerous providers including iShares with different offerings. For the lowest level of risk (with corresponding lower potential) consider treasury-based ETFs such as but iShares Lehman Year Treasury Bond Funds which have a short (SHY), medium and (IEF) long term (TLT) focus. With more risk comes the potential for greater returns so investors in this category might want to consider iShares Aggregate Bond Fund (AGG).