Bonds are back – but anyone who invests should be aware of interest rate risks, creditworthiness and terms. This 5-point plan shows what really matters before investing in a bond ETF for the first time.
• 5-point plan for investing in bond ETFs at a glance
• Risks are often underestimated
• Typical beginner mistakes can be avoided
A bond ETF is an exchange-traded fund that tracks the performance of an index of bonds (also called bonds or bonds). It enables private investors to be broadly diversified Bonds from states, companies or banks to invest without having to buy individual bonds. But anyone who believes that bonds are automatically safe is underestimating the risks. The specialist portal ExtraETF therefore points out five key points that investors should consider before making their first investment.
1. Interest rates and bond prices run against each other
The most important connection in the bond market is often underestimated: rising interest rates are depressing the prices of existing bonds. This also applies to bond ETFs. This can lead to noticeable price losses, especially in phases of rising key interest rates.
The so-called duration is particularly important. It shows how sensitive an investment is to changes in interest rates. Basically, the longer the term, the greater the price fluctuations.
2. Security depends on creditworthiness
Not every bond is automatically safe. In particular, corporate bonds with high interest rates – so-called high-yield bonds – carry an increased risk of default.
That’s why it’s crucial to take a look at your creditworthiness. Investors should check which borrowers are included in the ETF and how they are valued. The composition of an ETF should therefore be analyzed carefully before purchasing. Because higher returns usually also mean higher risks.
3. The term determines the risk
The term also plays a central role in bonds. Long-term securities react much more sensitively to interest rate changes than short-term bonds.
Classic bond ETFs usually do not have a fixed term because they continually buy new bonds. This means they remain flexible, but are more difficult to plan. So-called iBonds ETFs can be an alternative here because they combine fixed final maturities with the advantages of an ETF.
4. The return consists of more than just the coupon
Many investors only pay attention to the interest rate on a bond. In fact, the actual return depends on several factors – such as the purchase price, the current market interest rates and the repayment at the end of the term.
When it comes to bond ETFs, the current return (“yield”) is particularly important. The average coupon alone is not sufficient for a realistic assessment.
5. Currency risks are often underestimated
Global bond ETFs often invest in foreign currencies such as the US dollar. This creates additional opportunities – but also risks. Fluctuating exchange rates can have a significant impact on returns.
Anyone looking for stability should therefore check whether an ETF is currency-hedged or whether it consciously takes on foreign currency risks.
Opportunities and risks for investors: Use bonds specifically instead of blindly
Bonds can be attractive for investors – but they are not a sure-fire success, ExtraETF continues. If you understand interest rate trends, creditworthiness, terms, return calculations and currency risks, you can make your portfolio more stable and avoid unnecessary risks. iBonds ETFs in particular could be interesting for investors who are looking for predictable returns and at the same time want to invest in a broadly diversified manner.
For investors, this means above all: bonds should not simply be viewed as a “safe portfolio component”, but as a strategic instrument with clear opportunities and risks. Bond ETFs are particularly suitable for investors who want to make their portfolio more defensive. However, it remains crucial to adapt the selection to your own investment goals and personal time horizon.
Bettina Schneider, editorial team at finanzen.net
This text is for informational purposes only and does not constitute an investment recommendation. finanzen.net GmbH excludes any claims for recourse.