Morningstar columnist Paul Herbert recently sounded a warning to investors against selecting a bond exchange-traded fund over a plain-vanilla bond fund.
For one, while ETFs are praised for their low fees, bond funds already have low fees, Herbert notes. Also, there are trading costs associated with ETFs.
For another, while ETFs are more tax efficient because investors hold the underlying shares individually, bond fund capital gains distributions are so small that investors won’t notice tremendous tax advantages.
And as far as a passively managed bond ETF tracking an index is concerned, Herbert notes that there are a number of actively managed bond funds that have beaten out the performance of bond index funds.
Herbert concludes: “All in all, we still think there can be a place for ETFs in investors’ portfolios. But given the strengths of traditional bond mutual funds, we continue to think that they serve most investors very well.
“In summary, three key benefits—costs, taxes and returns—that equity ETFs have enjoyed aren’t very appealing when it comes to investing in bond ETFs.”