Twelve Things You Need to Know About ETFs

By Ben Steverman - 2012-02-27T22:16:37Z

Illustration by Dennis Pacheco

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How are ETFs changing bond investing?

By putting bond funds on stock exchanges, ETFs are "revolutionizing bond investing," says Balchunas. The traditional bond market is less efficient and less fair to small-time investors, he adds, and ETFs offer access to bonds they couldn't buy any other way.

Some advisers prefer bonds to be vetted by managers, usually at mutual funds. Very often these managers underperform their indexes, Jennings says. Morningstar says 9.4 percent of taxable bond mutual fund managers beat their benchmarks in 2011. ETFs can invest inexpensively in thousands of bonds, which reduces the risk if some bonds default. The municipal bond ETF iShares S&P National AMT-Free Bond Fund (MUB) spreads its $2.7 billion across about 1,800 securities.

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