Assuming I buy an ETF of American bonds and never sell it, does the volatility of the ETF's price affect me ?

 

If you buy an ETF that tracks American bonds and plan to never sell it, the volatility of the ETF’s price will not directly affect you, but there are indirect factors to consider:

1. Price Volatility and Your Investment Value

• The ETF’s price fluctuates based on the underlying bonds’ market value. While you're holding the ETF, these fluctuations won’t affect your income or principal return, as long as you don’t sell. Bonds in the ETF pay fixed interest (coupons), and as long as the issuer doesn't default, you will continue to receive those payments. If the ETF’s price drops, it is merely a temporary market condition unless you choose to sell.
• Key point: Volatility only matters when you sell the ETF; otherwise, your return is based on the income generated from the bonds themselves, not the price fluctuations​
  
  

2. Interest Rates and Bond Prices

• Bond prices are inversely related to interest rates. When interest rates rise, bond prices typically fall, which impacts the value of the ETF. Even if you don't plan to sell, a prolonged period of rising rates can reduce the value of your investment relative to its market price. However, this does not affect your coupon payments unless the issuer defaults.
• Impact of interest rates: Rising rates may mean lower prices for existing bonds, but they also provide higher yields for newly issued bonds, which might increase the income from your ETF over time​
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3. Inflation and Real Returns

• Even though you’re not selling, inflation can affect the real return on your bonds. If inflation rises significantly, the fixed interest payments you receive may not keep pace with rising costs. This won't change the nominal amount of interest you receive, but it will reduce its purchasing power.
• Inflation’s effect: If inflation is high, the fixed payments from bonds (and therefore the ETF’s income) may feel less valuable in real terms​
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4. Market Liquidity and ETF Pricing

• Even if you never plan to sell, the liquidity of the ETF can impact its bid/ask spread and the price you could theoretically sell it at, should your circumstances change. If the bond market becomes less liquid or if there are extreme market conditions, the price may swing more wildly, although this wouldn't impact you if you hold through the volatility.
• Liquidity risk: ETFs with low trading volumes or small assets under management may experience larger price fluctuations, but this generally only matters if you sell​
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Conclusion

Volatility in the price of the ETF itself does not directly affect your returns as long as you do not sell the ETF. Your returns will primarily be driven by the bond yields and the ability of the bond issuers to make interest payments. However, indirect factors like interest rate changes, inflation, and liquidity can still influence your total returns over the long term.

What is the advantage of trading a bond ETF over trading a bond directly ?

 

Trading a bond ETF (Exchange-Traded Fund) has several advantages over trading individual bonds directly. Here are some key benefits:

1. Diversification

• Broad Exposure: Bond ETFs typically hold a diversified portfolio of bonds, which can help reduce the risk associated with investing in a single bond or issuer. This diversification helps to mitigate the impact of default by any one bondholder.

2. Liquidity

• Easier to Buy/Sell: Bond ETFs are traded on stock exchanges like stocks, making it easier to buy and sell at market prices throughout the trading day. This intraday trading provides liquidity that is often lacking in individual bonds, which can have wider bid-ask spreads and lower trading volumes.

3. Lower Minimum Investment

• Accessibility: Investors can purchase shares of a bond ETF for a relatively low minimum investment, often just the price of one share, whereas purchasing individual bonds often requires a higher minimum investment.

4. Cost Efficiency

• Lower Transaction Costs: Buying and selling bonds individually can involve high transaction costs, especially for smaller investors. Bond ETFs tend to have lower transaction costs due to their ability to aggregate trades.

5. Ease of Management

• Simplified Administration: Bond ETFs handle interest payments and management of the underlying bonds automatically, eliminating the need for investors to track individual coupon payments or manage maturity dates.

6. Transparency

• Easier to Track Holdings: Bond ETFs typically disclose their holdings regularly, allowing investors to see the underlying bonds in the portfolio. This transparency allows investors to make informed decisions based on the current composition of the ETF.

7. Immediate Price Discovery

• Real-Time Pricing: ETF prices are updated in real time during market hours, providing immediate insight into market conditions and valuations, which can enhance trading decisions.

8. Specialized Exposure

• Targeted Investment Strategies: There are bond ETFs that focus on specific sectors (like high-yield or municipal bonds) or themes (like ESG), allowing investors to tailor their fixed-income exposure according to their investment strategies.

Conclusion

While there are advantages to trading bond ETFs, investors should also consider their investment goals, transaction costs, and the specific risks associated with bond investing. Individual bonds may offer unique benefits, such as guaranteed interest payments and capital preservation if held to maturity, which could be preferable in certain situations.

List of returns for US corporate and government bond ETFs by risk levels

 

Here’s a general overview of the expected returns for U.S. corporate and government bond ETFs categorized by risk levels, based on historical performance and yield characteristics. Note that actual returns can vary significantly over time due to market conditions.

Low-Risk Bond ETFs

Typically, these have lower returns due to their higher credit quality and stability.

1. iShares U.S. Treasury Bond ETF (GOVT)

o Expected Annual Return: 1.5% - 3% (historically lower returns)

2. Vanguard Short-Term Treasury ETF (VGSH)

o Expected Annual Return: 1% - 2.5%

3. iShares iBoxx $ Investment Grade Corporate Bond ETF (LQD)

o Expected Annual Return: 3% - 5%

Medium-Risk Bond ETFs

These may offer moderate returns with a balance of risk and yield.

1. Vanguard Total Bond Market ETF (BND)

o Expected Annual Return: 2% - 4%

2. SPDR Bloomberg Barclays High Yield Bond ETF (JNK)

o Expected Annual Return: 4% - 7%

3. iShares iBoxx $ High Yield Corporate Bond ETF (HYG)

o Expected Annual Return: 4% - 6%

High-Risk Bond ETFs

These tend to have higher potential returns, reflecting their increased risk levels.

1. Invesco Senior Loan ETF (BKLN)

o Expected Annual Return: 5% - 8%

2. SPDR Bloomberg Barclays Emerging Markets Local Bond ETF (EBND)

o Expected Annual Return: 5% - 10% (higher variance due to emerging market risks)

3. VanEck Vectors Fallen Angel High Yield Bond ETF (ANGL)

o Expected Annual Return: 6% - 9%

Considerations

• Market Fluctuations: Returns can be impacted by interest rates, inflation, and economic conditions.

• Historical Performance: These return estimates are based on historical performance and may not predict future results.

• Risk: Higher potential returns often come with increased risk, which should always be assessed in the context of an individual’s investment strategy.

For the most accurate and up-to-date returns, it’s advisable to check financial news sources or the respective ETF provider websites, as returns can fluctuate based on market conditions.