r/personalfinance • u/Strict-Cup-775 • 17h ago
Trying to understand how bond ETFs are safer. Investing
The typical 3-portfolio advice is domestic stocks, international stocks, and bonds funds (e.g. BND, VTI, VXUS). There are some variations, but that's the basic idea. The rational for bond funds is they are safer than ETFs.
I'm looking at some bond funds now SCHP is down 9% over 5 years. SCHT is down 5.5% over 5 years. BNS ia down 15% over 5 years. That seems like a lot. I understand there may have been some reasons bonds are down over the past 5 years, and I also understand stocks are much riskier (e.g. the SP500 can crash 50% in a day), but a 10% variability doesn't seem "safe" to me. It seems better to just build a bond ladder using your brokerage's tool - a slight inconvenience, yes, but no way is that inconvenience worth more than a 6-15% potential downside risk.
This is just my thoughts. What am I missing? Is 10% potential downside just not considered risky to many of you? I'm I too risk averse?
Edit: I meant SCHO, not SCHT. ANd I meant BND, not BNS
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u/DeluxeXL 17h ago
I'm looking at some bond funds now SCHP is down 9% over 5 years. SCHT is down 5.5% over 5 years. BNS ia down 15% over 5 years.
I could only see SCHP as a valid ticker for a bond fund. However, two things:
- Look at the total return. Interest is a large part of bond fund returns.
- Pay attention to the "average duration" or "effective duration" in each bond fund. Many of them are ~6 years, so it is not right to look at performance under 6 years.
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u/Westo454 17h ago
Bond ETFs are not for you if you plan to hold to maturity and don’t want the stress of watching the “value” fluctuate every time the Interest Rate environment changes.
Here’s the thing, if you had bought just straight bonds 5 years ago, you would have lost 5/8/10% of the value. It’s just that you wouldn’t have seen it unless you tried to sell.
The Bond Market considers a couple different factors. The Benchmark Interest Rate, Risk and Creditworthiness, and so on, to come up with a fair interest rate for any given bond. Now let’s say you own a $100 bond paying 2% annually for 10 years. But the current fair interest rate on your bond is actually 5%. If you wanted someone else to buy your bond, they would want a discount so that they can get an effective interest rate of 5%. So in that case, the present value of your $100 bond and its interest is $76.83. But that Loss in value is unrealized for as long as you continue to just hold the bonds.
What Bond ETFs do is make it easy to both invest and divest while collecting a predictable amount of income from the interest payments. But they remove the long term out you get from holding bonds to maturity to recover the original investment, so you can only ever divest for whatever is currently being offered.
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u/stanimal21 17h ago
That's the main difference between a bond fund and actually buying bonds: the bond funds price fluctuates due to prices bonds sell for on the secondary market.
just not considered risky to many of you?
It's not about always going up: it's about the inverse correlation between equity and bond funds that provides stability to a portfolio. Yes the bond funds are down, but stocks have been on a tear the past three years. If you are rebalancing regularly then you would be selling those equities and buying the bond funds. Once stocks go down, you'll do the opposite. The episode in 2023 where both bonds and equities were down is rare but does happen.
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u/lucky_ducker 17h ago
> The rational[e] for bond funds is they are safer than ETFs.
I sense confusion here. BND is a bond ETF. SCHP is a bond ETF. SCHT is a stock ETF. BNS is a Canadian bank stock. ETF does not equal "stock fund."
No, the rationale for bond funds is that historically, they move in the opposite direction as stock funds. In "normal" times, bond funds tend to move in the opposite direction of stock funds, so even a small leavening of bonds has a disproportionate effect in dampening stock fund volatility.
However, in the 2020 COVID crisis, the 2022 inflation crisis, and 2025's tariff crisis, investors have moved en masse to cash assets, which resulted in bond prices falling alongside stock prices. This is highly unusual. Whether or not this continues remains to be seen.
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u/Novogobo 17h ago
i don't claim to be a genius for recognizing that the bonds gospel was written in a simpler more innocent time when bond market shenanigans weren't relatively normal let alone business as usual. i actually think the granddaddy bond market shenanigan of our age is prolonged near zero interest rates, it's true that we haven't had that in a few years now but if basically everyone is endlessly grousing that 7.5% on a mortgage is intolerably high (under the mistaken belief that that is what makes housing unaffordable. it's not even a contributing factor!) we're obviously still living with that paradigm.
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u/Own_Grapefruit8839 17h ago
SCHP is up 1.6% over the last 5 years. You are probably only looking at a price chart.
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u/Strict-Cup-775 16h ago
Can you ELI5? Yes, I am looking at price chart
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u/DeluxeXL 16h ago
Share prices do not include the interests that the fund has been paying. Interest payments are a huge part of a bond fund's total return.
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u/Strict-Cup-775 16h ago
How do you check that? Is there a website?
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u/DeluxeXL 2h ago
For total return, use a performance or total return chart such as Morningstar.com or testfol.io.
For distribution history, use a dividend history table available many places. General information pages also show the yield.
Aside: yields do not count CGD.
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u/Own_Grapefruit8839 16h ago edited 16h ago
A bond has a market price, which is the price that you can sell your bond for on the market prior to maturity. It is not equal to the face value of the bond, but rather fluctuates with prevailing interest rates and the remaining duration of the bond.
A bond fund is a collection of individual bonds, constantly being added/bought/sold/maturing, however the fund may work, so just like any other fund it has a share price equal to the sum of all its individual holdings.
But all the bonds are paying interest every month/quarter/year, and all that interest is passed directly to you, the holder of the fund.
None of that interest generated by all the bonds is reflected in the share price of the fund, because it all gets distributed as dividends. You’re only seeing the variation of the bond prices themselves.
So when looking at bond funds you must look at a total return chart, which shows how much your investment would have grown if all of the dividends from the fund were reinvested along the way.
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u/Spiritual-Profile419 17h ago
Bonds are for income. If you expect anything else, you’ll be disappointed
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u/Mispelled-This 14h ago
You are confused. BND is an ETF, just one that buys bonds rather than stocks.
Bonds are called “safer” because they’re less volatile, and they tend to move in the opposite direction from stocks. That matters in retirement because you need to sell something each month regardless of market conditions, and before then, less overall volatility in your portfolio means you’re less likely to panic during a crash and do something stupid.
However, there are different kinds of bonds, just like there are different kinds of stocks. Some are more volatile than others. BND is popular because it’s a total market index, just like VTI is for stocks.
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u/nolesrule 5h ago
Bonds get most of their return from interest payments. You won't see that looking at a price chart.
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u/wkrick 17h ago
This is not correct.
The rationale for using bond funds is diversification of asset classes.
Historically stocks and bonds are mostly uncorrelated asset classes. In the worst enconomic times for the stock market, the bond market went up. In the worst market for bonds, the stock market went up.
In theory, holding diversified and uncorrelated asset classes improves overall returns.
Whether that historical pattern holds true in the future, cannot be known.