Options for an ETF Bond

A bond is a cash loan to an entity, such as a company or a government, for which you receive interest on the loan. Bonds are typically less risky than equity investments, such as stocks. But the rewards are also less. You have options for how you choose to trade bonds. Exchange-Traded Funds -- ETFs -- trade on stock markets like regular stock, but often cover non-equity markets, such as gold, oil and even bonds. Many ETF options exist for bond investing.

U.S. Bond Market ETFs

For investors that want returns similar to the overall bond market in the United States, you have a few ETF options. Among the largest bond ETFs are the iShares Lehman Aggregate Bond Fund, with ticker AGG, and Total Bond Market ETF, with ticker BND. Purchasing shares in these ETFs is easy to do in any standard brokerage account, and their performance will correlate to the U.S. bond index. If you trade actively or even day trade to profit from slight fluctuations in bond prices, these two ETFs are good options since their size and trading volume ensure liquidity. Lesser-traded ETFs may be difficult to enter and exit in a timely fashion due to lower demand.

Leveraged Bond ETFs

A unique quality of the ETF market is the ability to leverage certain investment products in ways that are not available when trading the products directly. A leveraged ETF lets you double or triple the returns of an underlying product. The Direxion 10-Year Treasury Bull Triple-Leveraged ETF, with ticker TYD, moves at approximately three times the rate of the 10-year U.S. Treasury bond. This means that if the bond market rises by 1 percent on a day, this ETF will rise by 3 percent. Leveraged ETFs are designed for active traders who want to exploit daily fluctuations in the bond market. These ETFs are not wise for long-term portfolios, since they are rebalanced every day.

Inverse Bond ETFs

If you think the bond market is likely to drop in price, you can still profit from this by using an inverse bond ETF. This option is great for those with "bearish" mentalities who want to make money in a falling market. The ProShares Short Barclays Capital 20+ Year U.S. Treasury Index Fund, with ticker TBF, does exactly this. If the 20-year Treasury index drops by 1 percent, this ETF rises by 1 percent. When the bond market performs well, this ETF loses value. Inverse ETFs are an example of the unique ability of ETFs to extend the speculative possibilities in any market, including the bond market.

Inverse Leverage Bond ETFs

For traders with aggressive bearish perceptions on the bond market, an ETF such as the Direxion 10-Year Treasury Bear 3X, with ticker TYO, is a good option. If the bond market drops by 1 percent on any day, this ETF will rise by 3 percent. It leverages the inverse returns of the bond market to provide active traders with this added versatility in their strategies. The inclusion of inverse leveraged bond ETFs in a trading strategy allows anyone to potentially make money on any type of fluctuation in the bond market, up or down, and do so with significant performance when timed well.

References

• Yahoo! Finance: Exchange-Traded Funds Center
• Stock Encyclopedia: Direxion 10-Year Treasury Bear 3X - Triple-Leveraged ETF (TYO)
• Stock Encyclopedia: iShares Lehman Aggregate Bond Fund (AGG)
• Stock Encyclopedia: Total Bond Market ETF
• Stock Encyclopedia: Direxion 10-Year Treasury Bull 3X - Triple-Leveraged ETF
• Stock Encyclopedia: ProShares Short Barclays Capital 20+ Year U.S. Treasury Index Fund