Bonds with benefits

19 ETFs

  • Emerging Markets Bond ETF (iShares)
  • EUR Corporate Bonds ETF (Lyxor)
  • EUR Government Bonds ETF (VanEck)
  • Euro Aggregate Bond ETF (iShares)
  • Euro Aggregate Bond ETF (SPDR)
  • Euro Corporate Bond 0-3yr ETF (SPDR)
  • Euro Corporate Bond 1-5yr ETF (iShares)
  • Euro Corporate Bond ESG 0-3yr ETF (iShares)
  • Euro Corporate Bond ESG ETF (iShares)
  • Euro Corporate Bond ex-Financials ETF (iShares)
  • Euro High Yield Corporate Bond ETF (iShares)
  • Euro Highest Rated Macro-Weighted Government Bonds (Lyxor)
  • Eurozone Government Bond 1-3yrs ETF (Xtrackers)
  • Global Corporate Bond ETF (iShares)
  • High Yield Corporate Bond ETF (iShares)
  • Italy Government Bond ETF (iShares)
  • US Bonds (1-3Y) ETF (Lyxor)
  • US Government Bonds (3-7Y) ETF (Lyxor)
  • USD Treasury Bond 1-3yr ETF (iShares)
View all thematic lists

Bond ETFs: the hidden power of a stable portfolio?

How much do you know about bond ETFs? Through their very nature, they don’t generate many headlines, but bonds are an important tool for experienced long-term investors. Bonds are very different to stocks, and that’s precisely why they can complement each other so well in a volatility-proof portfolio.

That’s why we’ve put together a handy thematic list of bond ETFs you can invest in. You might notice that Bond ETFs appear different from some of the other themes, but they certainly deserve a spot in the collection. Bonds are a useful investment to reduce the risk you take with more volatile stocks in your portfolio. And therefore really worth delving into.

In this article, you can read what bonds are, what the difference is between stocks and bonds, what risks and benefits are associated with bond ETFs, and why investing in bond ETFs makes an investor’s life so easy. We also discuss the bond ETFs in which you can invest with BUX and include them directly in your BUX Investment Plan.

What is a bond?

The simplest way to describe bonds is that they’re tradable loans from companies, governments or other organizations. And with BUX it’s possible to invest in those loans. 

Technically speaking, a bond is a debt instrument which has recorded a specific financial agreement. In exchange for the money you lend, as an investor, you will receive a pre-agreed amount in interest at a fixed time (e.g. every year). When the term of the loan is over, you will also get back the invested amount. It’s that simple. But bonds – known as stable investment products with relatively low risk – also have risks.

What are the risks of investing in bonds?

The worst-case scenario is that you will not get back the money you lent, as an investor. This can happen if a company or government with which you have an outstanding bond goes bankrupt. Another risk of a bond is that a company or country is in trouble and cannot pay you the agreed interest. In addition, the price of the bond may fall. 

So why are bonds considered relatively safe? A bond is considered a low-risk investment because countries rarely go bankrupt. And if a company goes bankrupt, bondholders are the first to get their money back. Even before the shareholders.

Bonds and interest rates

If you invest in bonds, it’s important to remember that the market interest rate and the bond price are intertwined. If interest rates rise, current bonds lose their luster, because new loans will yield more interest and become more attractive. This, in turn, depresses the price of previously issued bonds. 

This works the other way around, too. When central banks cut interest rates, bond prices can actually be boosted

We have been dealing with low-interest rates for quite a few years. But since this year, the trend has moved in the opposite direction. In 2022, interest rates have risen sharply again and will likely rise again. That’s good news for the fixed returns you can get on new bonds.

How do you choose the right bond ETF?

Like all investments, the bond ETF that suits you best will depend on the risk you are willing to take.

The first thing to look for is whether the bond ETF invests in corporate or government bonds. Government bonds are generally less risky than corporate bonds, but yields also tend to be lower.

You can check the creditworthiness of bonds by checking their credit rating. These can range from AAA to C or D. Bonds with an AAA rating have the highest credit rating – and therefore the lowest risk that the country or company will be unable to pay your deposit or interest. 

With the lower ratings, C or D, the risk of default is higher. Bonds with low ratings are the so-called high-yield bonds, also known as junk bonds. On the other hand, the higher the risk, the more interest (and higher yield) you can get.

If you’re just looking for security, then the highest-rated bonds are likely to be a good fit for your investment profile. But then you generally do not have to expect high returns. If you want the best of both worlds you can opt for bond ETFs with different ratings.

The term of the loan is also a factor. Short-term bonds are often less risky than longer-term bonds. This is because there is a smaller chance that market interest rates will rise in that period. Generally speaking, it’s good to vary those maturities so that your portfolio contains bonds that will respond in different ways to economic trends.

How does the price of bonds work?

If you invest in bonds via ETFs, as is possible with BUX, you automatically invest in many different bonds. The value of these bonds may change over time.

And that’s where it gets a little more complicated. Supply and demand, the level of interest rates and the policy of the central banks can have a lot of influence on bond prices.

Like shares, these prices go up and down, but bond prices tend to be more stable. The volatility – also known as the risk – of a broadly diversified portfolio of bonds is historically about four times smaller than that of a broadly diversified portfolio of equities.

That said, bond prices do change – and therefore your return can also change if you invest in bonds. If you hold onto a bond until the end of its term, you will usually get your investment back, or the price that applied when the bond was issued. But if you sell a bond before the term has expired, you will be dealing with the price that applies at that time, which can be lower or higher than when you started.

Bond ETFs on BUX

On BUX you will find 19 bond ETFs that you can immediately include in your portfolio. We’ll take you through five of them, to introduce you to the different types of bond ETFs out there.

iShares USD High Yield Corporate Bond UCITS ETF

This ETF allows you to invest in a wide variety of high-yield corporate bonds from around the world. The ETF tracks the Markit iBoxx USD Liquid High Yield Capped Index, which includes 1296 corporate bonds with historically high returns. All bonds in this index are denominated in dollars.

The index includes major companies such as T-Mobile, Occidental Petroleum, Ford Motor Credit Company and Sprint Corp. The ETF is managed by BlackRock and had assets of approximately $6.5 billion in the second quarter of 2022.

iShares J.P. Morgan USD Emerging Markets Bond ETF

This ETF allows you to invest in more than 590 bonds issued by governments or SOEs in emerging markets. The ETF tracks the J.P Morgan EMBI Global Core Index, which includes government bonds from countries such as Saudi Arabia, Turkey, Qatar, Brazil, Indonesia and the Philippines. 

The bonds in this index are denominated in dollars. The ETF is managed by BlackRock and was worth about $8.9 in the second quarter of 2022

Lyxor ESG Euro Corporate Bond ETF

If you’re looking for sustainability in your portfolio, you can invest in bonds of European companies with a high ESG score (Environmental, Social and Governance) via this ETF. The ETF tracks the Bloomberg Barclays MSCI EUR Corporate Liquid SRI Sustainable Index, which includes 2118 corporate bonds, expressed in euros, with a minimum term of one year.

In this index, you will find well-known European names such as Total, BNP Paribas and Orange. Investing in ETFs like these allows you to receive interest from many European corporate bonds. The ETF, managed by Lyxor, was worth $806 million in the first quarter of 2022.

Lyxor ESG Euro Corporate Bond ETF

This ETF lets you invest in short-term US Treasury bills by focusing on short-dated AAA US Treasury bonds and tracking the ICE U.S. Treasury 1-3 Year Bond Index. 

The ETF seeks to track the performance of an index composed of government bonds issued by the US Treasury in US dollars. This means all these government bonds come from the same country, but it’s the country with the largest economy in the world. BlackRock manages the ETF and together the bonds in the ETF are worth about $8 billion.

Lyxor Euro Highest Rated Macro-Weighted Government Bonds ETF

This ETF allows you to invest in top-rated Eurozone government bonds by tracking the MTS Mid Price Highest Rated Macro-Weighted All-Maturity Index. The bonds in this index have an AAA or AA rating and a minimum maturity of one year.

German bonds make up the majority of the ETF, followed by French and Dutch bonds. If you invest in this ETF, you can earn interest on many Eurozone bonds through one ETF. In the first quarter of 2022, this Lyxor-managed ETF was worth around €650 million.

What do you need to know about bonds in your BUX Investment plan or portfolio?

In general, the value of stocks fluctuates more than that of bonds. Therefore, with stocks, there is more movement and trading volumes, and returns are generally higher than with bonds. But so is the risk. That is why you can say that the longer you have to achieve your investment goals, the more risk you can take and therefore the more stocks you can choose in your portfolio. If you have less time and are more risk-averse, you can include more bonds in your plan. Stocks and bonds are different, but they can therefore complement each other well.

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All views, opinions, and analyses in this article should not be read as personal investment advice and individual investors should make their own decisions or seek independent advice. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication.