Bond ETFs and Fixed Income ETFs
Bond ETFs are used by many investors as part of the fixed-income component of their portfolios. How do they work? Can they be of potential interest to covered-call and cash-secured put writers? Let’s briefly explore the world of fixed income investing. The purpose of bonds in a portfolio is to produce periodic, usually monthly, income. Bonds are issued by companies or governments to raise money. Remember, a bond itself is a debt security, through which the bond issuer pays the bond holder a periodic fixed rate of interest over a set period of time and after which the whole sum is returned to the investor when the bond matures. Bond can be though of as loans: The investor is loaning money to another entity and expects the money to be returned in full along with interest as compensation. Single bonds are subject to a number of risks including interest rate-risk, callablility, and credit quality. The value of any given bond can and will fluctuate in price as interest rates change. To mitigate some of these risks, a portfolio diversified across many bond issues can be safer than holding one or two individual bonds. Many people use bond funds as a way to diversify. There are numerous subcategories available to investors. In the US, these include Indexed bond funds, Government-only funds, US Municipal bond funds, Corporate bond funds, Mortgage-backed bond funds, Foreign bond funds and Leveraged bond funds. Within each category there are many ETFs from which to choose. Do any of these funds have associated put and call options? As always, open-ended mutual funds do not. However, some (but by no means all) bond ETFs do. So, with these not only will you receive monthly interest income, you can also generate additional income by writing covered calls. You can write cash-secured puts and get paid to potentially acquire these assets at lower prices as you see fit. And, you can protect your investment with protective puts. Here are a names that may be of interest (no pun intended!) to you: iShares Barclays Aggregate Bond Fund (AGG), Vanguard Total Return Bond Market ETF (BND), iShares Barclays 7 to 10 Year Treasury Bond Fund (IEF), SPDR Barclays Capital International Treasury Bond Fund (BWX), Proshares Ultrashort 20+ Year Treasury Bond Fund (TBT) and iShares Barclays 20+ Year Treasury Bond Fund (TLT). Bond ETFs can be an excellent way to add fixed-income diversification to your investments. What you now know is that certain of them are optionable. Thus, they are amenable to conservative options strategies that make them even more valuable to the knowledgeable investor.
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