Corporate Bond ETFs

The corporate bond market is notably one of the largest and apparently most liquid among the financial markets. Corporate bonds are appealing to investors because they are considered to be safer than investing in stocks, and they normally bring higher returns than other bonds, like municipal or treasury bonds. In the past, however, investing in the corporate bond market was quite a hefty task. But now, with the introduction of exchange-traded funds (ETFs) specifically for corporate bonds, this has changed. Corporate bond ETFs are now more attractive and the returns are higher.

How does investing in corporate bonds work?
Any given company requires money to operate. However, sometimes they cannot come up with the money from their earnings. As a result, a firm may issue a debt instrument in the form of a corporate bond while pledging future earnings as collateral. The bonds issued are then taken by investors who in turn offer the company the money they need. A corporate bond has a standard pay rate or interest also known as a coupon which makes bonds quite alluring to investors. The downside is that corporate bonds carry more default risk as compared to other bonds. The company could go out of business, thus failing to repay the amount. Fortunately in the business world, the higher the risk equates to more rewards.

Corporate bonds are issued by all sorts of companies, from the largest and most creditworthy, to the smaller ones with little credit worth. Being a risky transaction, any investor interested in the corporate bonds market must carry out a thorough research on the creditworthiness of the company before purchasing securities. The corporate bonds are usually analyzed by credit rating agencies to assign credit ratings to the specific companies. This is a very critical process that can serve as a starting point in the evaluation of the corporate issuer. Those with higher ratings are the ideal companies with which an investor can transact.

Besides the credit rating, cautious and ambitious investors usually go further into analyzing the underlying fundamentals of the company in question. By so doing, an investor can be successful eventually since he or she will be certain of the safety of his or her investment.

What makes corporate bonds ETFs different?
ETFs are basically investment funds that are traded on the stock exchange market. As a result, corporate bonds ETFs are more profitable than the usual corporate bonds. With the ETFs being sold like stock, the investor gets additional benefits to the stable and compulsory returns from the bonds. ETFs are also much more tax efficient too because they do not attract a very high turnover. Therefore, when the bond period, also called maturity period, ends, the investor who opted for the corporate bonds ETFs, is smiling all the way to the bank to retrieve a fat amount from the account.

Why you should invest in corporate bonds
Since they are perceived to be riskier than any other type of bonds, corporate bonds generate higher returns. This is why many investors opt for them, especially such investors who accept a little more risk in their business.

At the same time, these bonds are viewed by many people as being safer than common stocks. This is because in the corporate structure of a company issuing the bond, bondholders are given priority over normal stockholders in case the company suffers bankruptcy. This, therefore, means that it is not as easy to retain your investment if you are a stockholder as it is when you are a bondholder. Most importantly, these bonds are not correlated in any way with stocks or any other bonds or assets class; hence they provide an additional diversification to an investor’s portfolio.

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