Bonds: Pros and cons of buying them directly
— -- Q: Is investing in bonds by buying bond exchange-traded funds (ETFs) and mutual funds as safe as buying them directly from the issuer, such as the U.S. government?
A: You can get the best deal on produce, often times, by buying direct from the farmer. And sometimes you can get a better price on a used car by buying straight from the owner.
Skipping the middleman certainly can have advantages. And that can also apply when investing in bonds, especially Treasuries issued by the federal government.
While it's possible to invest in bond funds that buy Treasuries, you can often save yourself some money and gain some advantages by buying directly from the U.S. government.
But you can buy Treasuries free either from the U.S. government or from several online brokers. The government sells Treasuries to individuals at www.treasurydirect.gov. Fidelity and Schwab are among the online brokers that offer very reasonable pricing on Treasuries.
Buying Treasuries directly has another benefit — control. If you buy a Treasury with a face value of $1,000 that matures in 2050, you are entitled to receive that $1,000 back in 2050, plus interest payments along the way. That guarantee of return, one of the biggest benefits of bonds you buy and hold, is lost with bond ETFs and mutual funds.
When you own a bond ETF or mutual fund, you do not have a guarantee of your investment being returned. Instead, to recoup your investment you must sell your shares, for potentially less than what you invested.
While there are benefits to buying Treasuries directly, there is some convenience to buying bond ETFs and mutual funds that may be worth the small fee.
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