Investors being short-changed by bond ETFs

Investors being short-changed by bond ETFs

Fixed income managed funds and ETFs should be considered as a separate asset class to owning the underlying products directly, according to XTB.


Speaking to InvestorDaily, XTB chief executive Richard Murphy explained that the structure of managed funds and ETFs removes some of the core features offered by bonds.

“Managed funds and ETFs are perpetual – they never mature. So you’ve just lost the most fundamental economic feature that drives all the performance of what you bought in the first place,” he said.

“You want to get your money back, you want to know when you get your money back, you want the capital stability of getting your money back, and suddenly that’s gone.”

Purchasing bonds directly offers investors capital stability and the ability to know what their returns will be over for the duration of the bond, assuming the issuer doesn’t collapse, Mr Murphy said.

“You lose all of that with a managed fund or an ETF because they literally don’t have any idea today what’s going to be in the managed fund or ETF in three, four, or five years because all the bonds keep on maturing and have to be replaced with bonds that don’t even exist yet, so it’s entirely different,” he said.

Mr Murphy said fixed income managed funds and ETFs still served a purpose to investors, but shouldn’t be considered as an analogue for direct fixed income investment.

“It doesn’t make it a bad proposition, it just makes it very different economically to when you own the bonds individually yourself,” he said.

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