Bond ETFs

About Bond ETFs

The lesson worth absorbing here is that bond funds are not safe in the way people assume. A long-dated treasury fund can lose a third of its value without a single borrower missing a payment, purely because rates rose. Bonds held to maturity return your principal; a bond fund never matures, it keeps rolling, so you own the price risk permanently.

Two variables explain nearly everything. Duration tells you how much the fund moves when rates move, and it is the number to check before anything else. Credit quality tells you whether you are being paid for interest rate risk or for the chance of default. A short-dated treasury fund and a high yield corporate fund are both called bond funds and share almost no risk in common.

High yield deserves particular care, because it correlates with equities rather than hedging them. It falls when stocks fall, which is exactly when you wanted the bonds to help. If the point of the allocation is to offset equity risk, government debt does that job and corporate credit largely does not.

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