Investing in bonds can be attractive because of their relative safety and the regular income that they provide. Two popular ways that many people choose to invest in bonds is through the bond exchange traded fund and through a bond ladder. Both of these options provide some advantages and drawbacks for you to consider before getting involved.
Bond Ladder
A bond ladder is a type of investment tool that you can set up on your own in your portfolio. With this type of investment, you divide your money up into several different bonds with varying maturity dates. You can stagger the maturity dates of the bonds so that you always have payments coming in at different times of the year. This allows you to create a regular source of income for yourself throughout the long-term.
Bond ETF
The bond exchange traded fund or ETF is a type of investment that you can purchase through your broker. The bond ETF is similar to a bond mutual fund except that you can buy shares of it through a stock exchange. The bond ETF is managed by a professional money manager and they buy and sell bonds for the fund. With the bond ETF, the money manager takes care of staggering the payments so that everyone is receiving regular interest payments throughout the year.
Control
One of the key differences between these two types of investment strategies is in the level of control that the investor has with each. When you use a bond ladder, you are in complete control of your own investments. You have to choose the bonds for your portfolio and you directly collect the interest payments. With the bond ETF, you leave all of the details up to a professional money manager. The fund then collects the interest payments and sends out the payments to the investors.
Fees
When using both of these investment strategies, you need to consider the amount of fees that you will have to pay. With a bond ladder, you may have to work with a bond broker to purchase the appropriate bonds for your portfolio. This would require you to pay them a commission for the amount that you spend. With the bond ETF, you will have to pay a commission when you buy the shares and you will also have to pay an ongoing expense ratio every year to compensate the fund manager.
