Quote:
Originally Posted by collie1228
I have never understood bond funds. If I buy the bond and keep it to maturity, I get 100% the interest and all of my principal back at the back end (although rarely there could be a default). Bond funds don't do that.
|
The amount of capital in bond funds and bond ETFs is huge. A lot of money — including smart money — finds value in fixed income investing in funds and ETFs rather than investing in individual bond issues.
Most fixed income investors do not have the skill, time, or motivation to make good decisions to pick bond issues. Managers of bond funds and bond ETFs do. Moreover, most fixed income investors do not have the capital to invest in too many bond issues and, thus, are exposed to much higher default risk compared to investing in funds and ETFs holding hundreds or thousands of bonds. If a bond investor buys one bond and its defaults, they can loose a lot of their wealth. With bond funds, one bond default is insignificant.
Also, if you buy a bond with a lower coupon rate as we have had in the recent past and inflation grows to, say, two times your coupon rate, you suffer greatly from high inflation by holding your bond to maturity, years in the future. In technical terms, you are exposed greatly to ‘interest rate risk’ even when holding to maturity by owning a single bond with long bond duration. The bond principal you get years in the future will not be worth nearly as much in times of higher inflation, which a low coupon rate won’t compensate you adequately.
If lots of capital is in a particular kind of investment structure, it serves a positive purpose to a large group of investors. Overall, money is not dumb money.