As a person buys shares of a bond ETF, they essentially are purchasing a piece of a bond portfolio. However, unlike individual bonds, the majority of ETFs do not have a maturity rate. They trade on an exchange, similar to stocks, and investors can purchase or sell them at any time during the trading day. Kavan Choksi marks that no matter whether one aims at diversifying their portfolio, gaining protection against stock market volatility, or simply generating income, bond ETFs would be a convenient fixed income solution.

Kavan Choksi briefly talks about the trading flexibility of bond ETFs

For several decades, traditional mutual funds have provided a number of advantages related to building an investment portfolio. Mutual funds offer investors with relatively low cost, daily liquidity, professional management and broad diversification. Exchange-traded funds (ETFs), however, take advantage of mutual fund investing to a whole new level. ETFs are able to provide lower operating expenses in comparison to traditional open-end funds, greater transparency, and flexible trading. Bond ETFs generally have lower operating expense ratios (OERs) in comparison to bond mutual funds, especially actively managed funds.

Traditional open-ended mutual fund shares are traded just once per day after the markets close. All the trading is done with the mutual fund company issuing the shares. Investors need to wait till the end of the day when the fund’s net asset value (NAV) is announced to know the price they paid for new shares when buying that day and the price they shall receive for the shares to be sold that day. While this once per day trading might be fine for the majority of the long term investors, a lot of them do demand greater flexibility. This is where bond ETFs provide to be an advantageous addition to the investment portfolio. Kavan Choksi points out that similar to stocks, bond ETFs trade throughout the day and can use limit and stop-limit orders.

ETFs are purchased and sold off during the day when the markets are open. The pricing of ETFs tends to be continuous during normal exchange hours. The share prices may vary throughout the day, depending on the changing intraday value of the underlying assets in the fund. The nearly instantaneous trading of bond ETFs makes intraday management of a portfolio extremely easy. It becomes fairly simple to money between specific asset classes, right from bonds and stocks to commodities. Investors get the flexibility to get their allocation into the investments they want in one hour and then change their allocation a few hours later.

Investors may additionally want to gain portfolio exposure in varied industries, sectors and domains, but they do not have expertise in those areas. Owing to the wide variety of industry categories available, ETFs can provide investors with easy exposure to a certain desired market segment. Moreover, as they generally invest in many individual bonds from different issuers, bond ETFs are able to mitigate the impact to the investor in case the bonds from a single issuer either fall in value or default.