The 411 on Bonds - Types and How to Invest

Maura Schauss |

By Todd I. Youngdahl, CFP®

Regular and predictable income during retirement can be hard to achieve, especially with today’s low to non-existent interest rates. Bonds, bond mutual funds, and bond ETFs are still the most consistent way to receive income while reducing your portfolio volatility.

Quick Bond Review

If bonds are confusing, think of it as a loan you make to an institution, whether it’s a municipality or state or corporation or the U.S. government. And in exchange, they pay you regular interest payments, and at maturity, they will give back the money you loaned them.

Bond prices move inversely to bond interest rates. When rates rise, bond prices fall.  This is because you hold a bond with a lower interest rate, which is less attractive than a new issue bond with a higher rate.

Let’s now take a look at bonds in more detail.

Individual Bonds

For a regular investor, individual bonds can be a tricky asset. You can’t buy bonds on an exchange; they are traded over the counter through bond dealers with one-on-one transactions with buyers and sellers.[1] Having a diversified bond portfolio as an individual is a pretty arduous accomplishment. If you are actively trading, then a bond mutual fund or bond ETF may give you more flexibility and save you time and money.

Bond Mutual Funds

A bond mutual fund is a basket of different bonds and can be structured by time horizon, investment grade, state, or issuer. If you scan bond mutual fund companies, you will see bond funds of every category. You may find short-term treasuries, Virginia municipal bonds, corporate bonds, and everything in between. When you sell, you are selling back to the mutual fund company, so there is always a buyer for your fund.

Mutual fund prices do not fluctuate during the day; instead, the net asset value (NAV) is calculated after markets close.[2] If you sell your mutual fund at 10:15 a.m., you won’t know the price until 4:30 p.m. Bond mutual funds are actively managed, so even though rates are low right now, active management can make a difference in eking out a higher price and dividend income. Bond mutual funds can be an excellent way to get broad exposure to many diversified bond categories.

Bond Exchange-Traded Funds (ETF)

Exchange-traded funds (ETFs) are also a basket of different bonds, but this is where the similarities end. ETFs are typically index-tracking funds. For example, an ETF can track the Bloomberg Barclays U.S. Aggregate Bond Index or the Tax-Exempt S&P Dow Jones Index, or many other indices. The purpose of the bond ETF is to replicate the index’s performance; there is typically no active management.

A bond ETF is traded on exchanges like a stock. You can sell throughout the day, and the price is in real time, unlike a mutual fund. ETFs usually have lower fees than mutual funds. In addition, their holdings are accessible on a daily basis, unlike mutual funds that release their holdings on a quarterly or semi-annual basis.

Bonds and Your Portfolio

So which one is best for you? At Washington Wealth Advisors, we help you set your financial goals and then pick the most appropriate investments to achieve them. These may include individual bonds, mutual funds, and ETFs. Each has attractive qualities as well as disadvantages.

Because we are a Registered Investment Advisor, building an individual bond portfolio is more accessible than doing it yourself, but may not be appropriate based on your asset allocation and portfolio size. For example, if you have an aggressive growth portfolio that is tilted toward stocks, then a small percentage of bonds may not warrant individual bonds. A mutual fund or ETF would give you bond exposure, income, and be more liquid and easier to invest.

We’re Here to Help

This is a lot of information, but don’t worry—you don’t have to figure it all out on your own. After your goals are set, we at Washington Wealth Advisors can develop an investment strategy and help set you on a course towards financial success. Call our office at 703.584.2700, or email or find a convenient time to talk with us using our online calendar to get started!




Washington Wealth Advisors is a fee-only registered investment advisory firm serving busy families, executives, women building wealth, and small business owners. We provide Wealth Advisory Services—financial planning coupled with asset management—guided by a personalized investment strategy based on each client’s unique goals. Our unbiased advice, independent approach, and proactive investment management help to support our clients’ overall financial peace of mind.