Buying Individual Bonds Vanguard !!EXCLUSIVE!!
A tool in the management of a bond portfolio that can be used to increase rewards or reduce risks by purchasing a number of bonds and structuring their maturities over time so that they mature at different dates. For example, buying 5-, 10-, 15-, and 20-year maturity bonds of equal value would be a bond ladder.
buying individual bonds vanguard
This page focuses on buying for yourself or a child whose account is linked to yours. If you are planning to give a savings bond as a gift, also see our page on Giving savings bonds as gifts. You can print a certificate announcing your gift. See our selection of announcement cards.
In any one calendar year, you may buy up to $10,000 in Series EE electronic savings bonds AND up to $10,000 in Series I electronic savings bonds for yourself as owner of the bonds. That is in addition to the amount you can spend on buying savings bonds for a child or as gifts.
Buying individual bonds offers unique challenges. In addition to a wide range of moving parts inherent in each bond, the primary market can be difficult to access for all but the wealthiest investors. Meanwhile, the secondary market has less transparent pricing than primary issues.
Buying individual bonds via your brokerage account is more complicated. Typically online brokers offer access to bond secondary markets, which means that availability and prices wholly depend on existing holders looking to sell.
An investor with a laddered bond strategy can get their principal back at set maturity dates, while a bond fund does not have any specific maturity date. However, the return experience for both strategies should be very similar as long as the comparison is made properly. Since bond prices and yields have an inverse relationship, and since coupon payments are fixed at issuance, bond price is the only element that can change. This allows all comparable bonds to retain a competitive yield to maturity in the marketplace. In the context of a rising-rate environment, the perception is that holding an individual bond to maturity has a monetary benefit over a bond sold at less than par because investors receive par value back at maturity, assuming no default risk.
When comparing a portfolio of individual bonds with that of a bond mutual fund, the risk characteristics of each strategy must be similar to make an equivalent comparison. On day one, a laddered bond portfolio may have the same characteristics as a comparable mutual fund, but if the investor does not maintain the same risk profile of the portfolio over time, that same mutual fund cannot be used to compare with the laddered bond strategy over the same time horizon. The benchmarking mutual fund needs to change as the profile of the portfolio changes.
In contrast to buying individual bonds and actively managing a laddered bond portfolio, a $20 million client could get exposure to the U.S. credit market by allocating capital to Vanguard's short-, intermediate-, and long-term investment-grade mutual funds in a market-cap proportional manner for an all-in cost of 0.10%.2 Investors should be able to obtain greater exposure and greater diversification at a fraction of the overall cost.
To prevent apparent loss, some investors might switch to individual bonds. That gives you "emotional control," says Christopher Philips, senior investment analyst for Vanguard. You collect your full principal when the bond comes due. But you don't get the increase in income that bond funds pay. To capture part of a rising rate, you might buy a series (or "ladder") of bonds that come due in different years. But bond funds are easier to own.
Like U.S. Treasurys, many international and emerging market bonds pay interest semiannually, although European bonds traditionally pay interest annually. Unlike U.S. Treasurys, however, there can be increased risks for U.S. investors who buy international and emerging market bonds, and buying and selling these bonds generally involves higher costs and requires the help of your firm or investment professional.
And as with other asset classes, I typically use index funds or ETFs that hold dozens of bonds instead of buying individual bonds directly. Unlike other asset classes, buying individual TIPS bonds is not impractical for individual investors, so it could be the better option in some cases.
After all the bonds in the portfolio mature, the ETF is closed and shareholders receive a final distribution equivalent to the fund NAV, after liabilities. This is a similar experience to the principal repayment of an individual bond at maturity.
Since launching in 2010, one U.S. Treasury, 10 municipal, 12 investment grade corporate, and one high yield and income corporate iBonds ETFs have successfully matured and liquidated. All 24 iBonds ETFs provided a total return experience that closely approximated holding a portfolio of individual bonds.
Bond investing offers advantages for certain investors, who can earn a rate of return while helping to build a better state. The state generally gives Oregonians who place orders for publicly offered state bonds through a broker top priority over institutional buyers like mutual funds. Learn more about buying Oregon bonds through a retail broker on our FAQ.
Because of their relative safety and historically high interest rates, I bonds might sound like a no-brainer investment. However, the process of buying them can be a slog, and there are a few big caveats about the savings bonds that you should know before you buy.
Studies have found that, among government bond funds, funds with low expense ratios generally outperform their peers. One low-cost bond mutual fund is a bond index fund. Bond index funds purchase the same securities that comprise a benchmark bond index, such as the Lehman Brothers Aggregate. Since the portfolio of securities is pre-determined by whatever bonds comprise an index, trading costs are minimal and bond index fund management expenses are low. Like individual bonds, bond funds with the longest maturities are extremely volatile when interest rates fluctuate. Conservative investors should select short-term bond funds consisting of investment grade securities. 041b061a72