Bond Market

Right Idea, Wrong Product?

Doug Drabik discusses fixed income market conditions and offers insight for bond investors.

Some subtle characteristics may deliver comparable results while others can make big differences. A portfolio of individual bonds or a fund with bonds may appear to possess only a subtle name difference, however they are two very different products and may protect your principal very differently.

Given the substantial inflow of money into bond funds and bond ETFs this year, the distinction between them and individual bonds should be understood. This year massive money inflows have surged into bond funds suggesting investor behavior is thrusting toward a less risky class of investments. 

According to ICI data, in 69 of 71 weeks since March 15, 2020 money inflows into taxable bond long-term funds and ETFs has been positive. Similarly, 68 of the 71 weeks reflect positive inflows into municipal long term funds and ETFs. Since the beginning of 2020, the net inflow of funds has been $928 billion.

An important difference between funds, ETFs and individual bonds is that individual bonds have a stated final maturity. By holding an individual bond to maturity, all interim market price fluctuations are irrelevant and the full face value of the individual bond is returned at maturity (barring default). This feature is what sets individual bonds and their protective nature apart from nearly all other investments. Bond funds and Bond ETFs do not have stated maturities, therefore principal is not protected in the same way. If the idea is to protect principal, the right product may be individual bonds.


To learn more about the risks and rewards of investing in fixed income, please access the Securities Industry and Financial Markets Association’s “Learn More” section of investinginbonds.com, FINRA’s “Smart Bond Investing” section of finra.org, and the Municipal Securities Rulemaking Board’s (MSRB) Electronic Municipal Market Access System (EMMA) “Education Center” section of emma.msrb.org.

The author of this material is a Trader in the Fixed Income Department of Raymond James & Associates (RJA), and is not an Analyst. Any opinions expressed may differ from opinions expressed by other departments of RJA, including our Equity Research Department, and are subject to change without notice. The data and information contained herein was obtained from sources considered to be reliable, but RJA does not guarantee its accuracy and/or completeness. Neither the information nor any opinions expressed constitute a solicitation for the purchase or sale of any security referred to herein. This material may include analysis of sectors, securities and/or derivatives that RJA may have positions, long or short, held proprietarily. RJA or its affiliates may execute transactions which may not be consistent with the report’s conclusions. RJA may also have performed investment banking services for the issuers of such securities. Investors should discuss the risks inherent in bonds with their Raymond James Financial Advisor. Risks include, but are not limited to, changes in interest rates, liquidity, credit quality, volatility, and duration. Past performance is no assurance of future results.

Stocks are appropriate for investors who have a more aggressive investment objective, since they fluctuate in value and involve risks including the possible loss of capital. Dividends will fluctuate and are not guaranteed. Prior to making an investment decision, please consult with your financial advisor about your individual situation.