How ETFs are Transforming this Market

How ETFs are Transforming Bond Investing If you’re like most investors, you probably do not actively trade bonds. You also probably don’t engage in purchasing individual bonds with the intent of holding them until maturity and collecting your coupons along the way. That’s because for many investors, the bond market is understandably tricky – bonds are traded over-the-counter (OTC), prices are negotiated privately between buyers and sellers, and it can be difficult for retail investors to get information on pricing and/or to figure out where bonds are traded. Then came bond exchange traded funds (ETFs). These days, many fixed income investors rely on bond portfolio managers for help, and bond portfolio managers increasingly rely on bond ETFs for investing. And we believe that it is a good thing. The Benefits of Bond ETFs At a high level, ETFs can generally provide investors with an inexpensive, tax efficient way to achieve broad diversification in a bond portfolio. But ETFs can potentially go much further than that. They can help investors gain more precise control over fixed income investment features like duration, geographies, yield, ratings, and sectors. ETFs can also provide investors access to a myriad of bonds that, for many, were previously out of reach. Now, investors of any level or net worth can access high yield corporates, short or long duration Treasuries, state-specific municipals, or even global and emerging market bonds. In short, the doors to the bond world have swung wide open. Bond ETFs can serve as the core of your fixed income portfolio, diversify you holdings and help offset potential bouts of market volatility during market corrections. How Bond ETFs Work In the marketplace, there are thousands upon thousands of bonds of all different types. And as we mentioned before, bonds are often difficult to price and even harder to trade. So how is it that an ETF is able to track bond indexes that are comprised of hundreds or even thousands of bonds? The workaround for many bond ETF managers is to use a “sampling” approach, where they build an ETF that seeks to replicate the risk and return characteristics of a certain bond index. The larger, more reputable ETF providers can leverage their size and decades of relationships on the bond desk to facilitate trades in bonds of all types – even illiquid ones. The end result typically ends up being a smaller sample portfolio, where the end investor (you) can gain exposure to a wider variety of bonds than you likely could have achieved on your own. In this sense, not only do you get the potential benefit of a more broadly diversified bond portfolio, but you also have the benefit of the bond ETF manager hunting down the bond and working to ensure a fair price for you. Bottom Line for Investors When investors think about ETFs, they generally think about the stock market and equity ETFs. It makes sense why – in 1993, the first ETF that hit the market was an equity fund, and the first bond ETF didn’t arrive until nearly a decade later. But times have changed, and now bond ETFs are a viable option, in our view, for the construction of a fixed income portfolio – or the fixed income portion of your portfolio. With every day that passes, too, it seems that advances in bond indexing continue to follow. Some ETFs are now screening for different niches in the bond market that bond enthusiasts love to see, which according to Blackrock include credit quality relative to yield; rate and currency hedging; volatility management; and more controlled exposure to interest rates and credit spreads. We believe that it’s the dawn of a new era in bond investing. For investors, though, a big challenge still remains – there are over 1,000 bond ETFs available on the market, so which one(s) make sense for you? That’s where Zacks Investment Management has innovated with new financial technologies and now offers an actively managed robo advisor that: - Automate the advising process. - Investing exclusively with ETFs - Uses technology to recommend the appropriate mix of equities and bond ETFs to help achieve your investing goal and specific risk tolerance. - Lowering fees and expenses For further information, we recommend you read our report: The Savvy Investor’s Guide [Get your copy of The Savvy Investor’s Guide]( © Zacks Investment Management | [Unsubscribe]( DISCLOSURE Past performance is no guarantee of future results. Inherent in any investment is the potential for loss. Zacks Investment Management, Inc. is a wholly-owned subsidiary of Zacks Investment Research. Zacks Investment Management is an independent Registered Investment Advisory firm and acts an investment manager for individuals and institutions. Zacks Investment Research is a provider of earnings data and other financial data to institutions and to individuals. This material is being provided for informational purposes only and nothing herein constitutes investment, legal, accounting or tax advice, or a recommendation to buy, sell or hold a security. Do not act or rely upon the information and advice given in this publication without seeking the services of competent and professional legal, tax, or accounting counsel. It should not be assumed that any investments in securities, companies, sectors or markets identified and described were or will be profitable. All information is current as of the date of herein and is subject to change without notice. Any views or opinions expressed may not reflect those of the firm as a whole. 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