Smart Bond Investing—Bond Funds

Comparing Bonds and Bond Funds

 

 

Individual Bonds

Bond Mutual Funds

Closed-End Bond Funds

Bond UITs

Bond ETFs

Return of Principal

Principal returned at maturity or when bond is called

Principal at risk

Principal at risk

Receive principal back as bonds in UIT mature or are called

Principal at risk

Maturity Date

Set maturity date

None

None

UIT liquidated on set date

None

Income Payments

Usually fixed and paid semiannually (except zero-coupon bonds)

Fluctuating monthly payments

Fluctuating monthly or quarterly payments; may include principal

Fixed monthly, quarterly, or semiannual payments

Fluctuating monthly payments

Liquidity

Trade on secondary market above or below their face value, but some bonds can be hard to sell

Bought and sold at net asset value

Trade on an exchange with daily fluctuation in the unit price

Bought and sold at NAV

Trade on an exchange with daily fluctuation in the unit price

Redeemable

Redeemable only at maturity or when called

By selling shares at prevailing NAV

By selling shares at prevailing unit price

By selling shares at NAV

By selling shares at prevailing unit price

Default Risk

Varies by credit quality of bond

Limited by diversification

Limited by diversification

Limited by diversification

Limited by diversification

Interest Rate Risk

Exists but declines as bonds near maturity

Exists and sensitivity to interest rates depends on portfolio of holdings

Because some closed-end funds are highly leveraged, they can be very sensitive to interest rate increases

Exists and sensitivity to interest rates depends on portfolio of holdings

Exists and sensitivity to interest rates depends on portfolio of holdings

Expenses

No ongoing expenses; transaction charge built into price for purchases and sales

Annual fees; may have front- or back-end sales charge

Annual fees and brokerage commissions

Annual fees (usually lower than mutual fund fees) and front-end sales charge

Annual fees (usually lower than mutual fund fees) and brokerage commissions

Reinvestment

No automatic reinvestment option

Automatic reinvestment option

Automatic reinvestment option

Automatic reinvestment option

Automatic reinvestment option available for most but not all ETFs

Professionally Managed

No management

Actively managed (except index funds)

Actively managed

Passively managed

Most are passively managed; some are now actively managed

Diversification

Need to purchase multiple bonds to diversify

Constantly changing portfolio of bonds

Constantly changing portfolio of bonds

Fixed portfolio of bonds; less diversified than many bond mutual funds, closed-end funds or ETFs

Constantly changing portfolio of bonds

  • prev
    Bonds Versus Bond Funds
  • next
    Buying and Selling Bonds