How to Trade Bond ETFs?

Bonds are an excellent way for investors to make money while not considering the stock market’s daily fluctuations. With that being said, you will want to read this article on trading bond ETFs.

Different Types Of Bonds

As with any other financial product, many different types of bonds can be bought and sold. The four primary bonds are corporate, treasury, junk, and high yield bonds. Companies issue corporate bonds usually to raise capital for investment or expansion purposes.

The government issues treasury bonds to raise financial resources for public projects conducted by the federal government. Junk/high-yield/speculative/fallen angels are bonds issued by companies whose credit history is not the best. These types of bonds have a higher risk for default, but in turn, they offer a much higher return on investment than government or corporate bonds.

Daily Market Fluctuations

A great way to invest in bond ETFs without dealing with the daily market fluctuations is through an Exchange Traded Fund, which is nothing more than a mutual fund you can trade throughout the day, just like any stock. With this being said, when investing in bond ETFs, you will want to look at Vanguard’s Extended Duration Treasury Index Fund.

This type of fund invests in long-term treasury securities. It thus will increase or decrease its total value based upon interest rates and other factors impacting interest-rate sensitive investments like treasuries.

Shorting Bonds ETFs

A great way to make money on bond ETFs is by shorting them (going long on bond ETFs can be a risky proposition). When you go long, you predict that the product’s price will increase.

The opposite is true for when you make a short sale where you believe the security price will decrease in value over time, so you sell it now and repurchase it later when it has decreased in value. It allows you to profit from the difference in price between when you sold it and when you repurchased it at a lower price.

Macroeconomic Factors

When trading a bond ETF, many factors need to be considered within the market. One must look at macroeconomic factors such as employment numbers, retail sales numbers, currency values, and economic releases that impact the currency. You would also want to look at industry-specific factors that might help you determine whether the price of a bond ETF is going up or down.

For example, suppose North American natural gas prices start decreasing drastically. There will be more supply than demand for utility companies which usually increases the value of utility bond ETFs.

Investors Portfolio

Bonds are a significant part of an investor’s portfolio. They are not as volatile as stocks, have interest rates that can rise or fall over time, and help offset the volatility you see in the stock market. Suppose you are interested in trading bond ETFs. In that case, your broker will likely give you access to many different types, including long-term treasuries, short-term treasury bonds, high yield bonds, mortgage-backed securities, and municipal bonds. Each of these has different risk levels, so it is essential to know what you buy before placing any trades.

Individual Bonds

One way you can trade bond ETFs is through individual bonds themselves. If you prefer to buy them, you need to get a bond trading account through a broker. It will allow you to hold physical bonds in your name and buy and sell them on the secondary market. If you want this type of access, then look at all of the fees associated with it, including early redemption penalties.

Anytime you trade an ETF, you must know what you are buying. They can be quite different from one another; many share similar traits such as minimal volatility, interest rate sensitivity, and an average maturity of around ten years.



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