Futu Research | ETF Investment Research
[Bond ETF] After the interest rate cut, you can watch these US bond ETFs
Since 24 years, the movement of the US stock market has been clearly influenced by the market forFed Rate Reduction ExpectedImpact. Following the conclusion of the Federal Open Market Committee (FOMC) meeting on March 21, the Fed formally announced that it would keep interest rates unchanged, releasing potential signals to markets that three rate cuts could take place during the year.
Impact of interest rate reductions on bond prices
Lower interest rates generally increase the price of bonds, as well as the volatility of long-term bonds.
Imagine that you have a loan in your hand, which is like a bond, on which it says that someone has lent you 100 pieces of money and promises to give you a certain interest every year. Now that borrowing rates have decreased throughout the market, which means that now someone else just has to pay a lower interest rate than before if they want to borrow money.
That way, the bond you hold that promises to pay higher interest rates becomes a steal. Because your bonds are more profitable than newly issued, lower-interest bonds. So, if someone else wants to get that income, they're willing to pay more than the bond's face value to buy your bond, causing the price of the bond to rise.
As for term bonds, these are bonds that require a longer period of time to be repaid, which are more sensitive to changes in interest rates. When the local rate falls, the price of Long-Term Bonds increases more. This is why, for long-term bondholders, locking in future cash flows due to a relatively high fixed interest rate is more likely to increase value, so investors are more likely to Buy long-term bonds at higher prices, further pushing up other market prices.
Currently, the price of US Treasury bonds has fallen to relatively low positions due to the Fed's continued interest rate hikes. If the future Fed successfully enters a rate-cutting cycle, the overall level of market interest rates will fall, and the yield on newly issued Treasuries will also decrease. As a result, the relatively high yield of old bonds in the past quickly became a sensation, and investors sought these bonds that were able to lock in higher yields, driving the price of bonds back up.
At the same time, the yield on long-term government bonds will go down, as if they are saying that the economy may not be as prosperous in the future, while longer-term bonds are more favorable to safe investment types in the face of lower interest rates. Therefore, one day the easing policy is in the right place, it can be expected that national bond prices will welcome a surge in the market. Bonds ETFs are the payers of interest rates over the long term.
Direct Investment Bonds vs Investment Bonds ETFs
For Ordinary Investors, Investing in BondsETFWould be a little more convenient. The greatest advantage of bond ETFs is that investors can avoid the hassle of choosing specific bonds and directly hold different types of bonds at low cost to achieve the purpose of diversifying investments.
BONDS AND ETFS ARE ESSENTIALLY TWO COMPLETELY DIFFERENT TYPES OF TRANSACTIONS, BUYING A BOND CAN BE HELD TO MATURITY, BUT AN ETF IS ESSENTIALLY A FUND AND THERE IS NO “MATURITY” SO WHAT TO DO WHEN THE BOND IN THE ETF POSITION MATURES? Actually there is no need to worry about this issue at all:
VacationBuy one investment for more than 20 yearsU.S. TreasuryIn ETFs, ETF issuers check their positions every once in a while, sell some bonds that are less than 20 years away from their maturity date, and exchange them for new ones.
Based on this characteristic, the interest rate risk faced by bond ETFs is relatively high. However, if the purpose of investing in a bond is only for a stable interest rate, then you can still hold the maturity and changes in interest rates will not have an impact.
In addition to the above two points,Investment BondsAND INVESTMENT BOND ETFS, RESPECTIVELY, ARE:
There are different types of parties: Investment Bonds are held 1 to 2 times a year and Investment Bonds ETFs are held every month.
Trading threshold requirements and fees are different; investment bond fees include commissions, custodial fees, etc. The fees for investing in bond ETFs are the same as those for trading stocks, and an administration fee is required.
However, due to the characteristics of this type of investment, bonds or bond ETFs are suitable for long line investments and not for frequent short term trading (with the exception of leveraged and reverse ETFs).
What are the options for a US Treasury ETF?
TLT 20+ Years US Treasury Bond ETF
TLT（$iShares 20+ Year Treasury Bond ETF(TLT.US)$It is an ETF that tracks long-term US bonds, primarily investing in US government bonds with a short-term duration of more than 20 years. Working with the Long-Term Treasury Bond ETF, the yield on the TLT is closely related to the longer-term interest rate, which is usually good when market risk-averse rises or falls are not expected. It provides an effective tool for long-term interest rate hedging for investors looking for a stable cash flow and hedging Assets portfolio.
TLT Advantage: High liquidity provides investors with a simple and effective way to get returns on the long-term US bond market, with lower linkages between bonds, making the portfolio more diverse.
BIL US Treasury 1-3 months ETF-SPDR
CAR（$SPDR Bloomberg Barclays 1-3 Month T-Bill ETF(BIL.US)$) is an ETF that tracks short-term U.S. Treasury index performance, primarily investing in bonds issued by the U.S. Government with a remaining maturity of no more than 1 year. Since investments are short-term Treasury bonds, BIL has relatively low volatility and can be used as a configuration option as a cash management tool or as a lower-risk part of a portfolio
ADVANTAGES OF BIL: LOW RISK, LOW VOLATILITY, STABLE RETURNS FOR INVESTORS AND HIGH LIQUIDITY.
Disadvantages of BIL: Compared to long-term bonds, short-term bonds have limited capital appreciation when interest rates are lowered, so higher total returns may not be obtained.
GOVT iShares ASU Core US Treasury ETF
GOVT（$iShares U.S. Treasury Bond ETF(GOVT.US)$) is an ETF that covers all types of maturity bonds across the entire U.S. Treasury curve, designed to reflect the overall performance of the U.S. bond market. BY INVESTING IN TREASURY BONDS OF DIFFERENT YEARS, THE GOVT IS ABLE TO PROVIDE INVESTORS WITH COMPREHENSIVE RISK EXPOSURE TO THE U.S. BOND MARKET, EFFECTIVELY DISPERSING RISKS OVER DIFFERENT MATURITIES.
ADVANTAGE OF GOVT: TREASURY BOND INVESTMENT MATURITIES ARE DISTRIBUTED, WHICH IS A GOOD CHOICE FOR INVESTORS WHO WANT TO PARTICIPATE IN THE ENTIRE U.S. BOND MARKET AND CONDUCT RISK MANAGEMENT.
DOWNSIDE OF GOVT: BECAUSE IT CONTAINS VARIOUS MATURITY BONDS, ITS YIELD PERFORMANCE IS INFLUENCED BY THE MARKET'S DEMAND FOR DIFFERENT MATURITY BONDS, AS OPPOSED TO A SINGLE TERM TREASURY ETF STRATEGY IS CLEAR.
IEF US Treasury 7-10 Year ETF-iShares
IEF（$iShares 7-10 Year Treasury Bond ETF(IEF.US)$ It is an ETF that tracks the SSE Government Bond Index, which invests in medium-term US government bonds between 7 and 10 years. With respect to the TLT Long-term Treasury Bond ETF, there is some margin for yield upside in the course of the IFE yield volatility, which may in some way take on the downside risk.
The Advantage of IEF: Medium-term Treasury ETFs strike a balance between yield and safety, especially for investment configurations when the interest rate outlook is uncertain.
The downside of IEF: In an extreme interest rate environment, whether rapidly rising or falling sharply, it may not perform well on ETF products that specialize in long, short-term interest rate orientations.
SHV U.S. Short-Term Treasury ETF
SHV（$Short-Treasury Bond Ishares(SHV.US)$A short-term U.S. Treasury Bond ETF that invests in U.S. government bonds with an average maturity of less than 1 year. SHV is attributed to Ultra Short-Term Bond Fund Funds, with low credit risk, low interest rate volatility, good cash management tools and hedging assets, good cash management tools and hedging asset assets.
SHV Advantages: Extremely low volatility and risk, especially as a haven for capital in times of market volatility.
SHV DISADVANTAGE: LOWER POTENTIAL RETURNS AND CANNOT BRING SIGNIFICANT CAPITAL GAINS TO INVESTORS.
SCHR Schwab Intermediate-Term U.S. Treasury ETF
SCHR（$Schwab Strategic Tr Intermediate-Term Us Treasury Etf(SCHR.US)$A Short-Term U.S. Treasury Bond ETF offered by Charles Schwab, which invests in U.S. bonds with a maturity date of one year. ETF provides income close to MMFs while maintaining higher liquidity than MMFs.
The advantages of SCHR: Extremely low levels of risk, high liquidity, and relatively stable returns make it an ideal tool for short-term capital hedging.
Disadvantages of SCHR: During rising interest rates, its earnings growth is slower and may be lower than some higher-risk fixed income products.
What are the options for a U.S. Municipal Bond ETF?
MUB US Treasury Bond ETF-iShares
MUB（$S&P National Amt-Free Muni Bd Ishares(MUB.US)$) is an ETF focused on the U.S. municipal bond market that invests in tax-free state and local municipal bonds. These bonds are often used to finance public works and infrastructure, and interest income is exempt from federal income tax for qualifying investors.
MUB Advantages: For investors seeking a stable income and looking to reduce their tax burden, MUB is an ideal choice, especially under higher marginal tax rates.
MUB's disadvantage: Although the credit risk of municipal government bonds is low and not isolated from retail risks, certain municipal government projects may be subject to delinquency. Otherwise, the marginal tax advantage may be reduced as investors do not have to pay federal or personal tax rates.
US Ping An Chinabond Medium-High Grade Corporate Bonds Spread Factor ETF
LQD Bond Indices ETF-iShares iBoxx Investment Grade Corporate Bonds
LQD（$Ishares Iboxx $ Investment Grade Corporate Bond Etf(LQD.US)$) is an investment-grade corporate bond ETF that tracks the performance of the iBoxx USD investment-grade corporate bond index. The ETF holds the bonds of large, reputable companies, which often have solid finances and high credit ratings, providing investors with a relatively stable and higher-yielding investment channel than government bonds.
Advantages of LQD: When investing in investment-grade corporate bonds, LQD can provide a certain level of return relative to high-yield bonds. This is a suitable tool for investors looking to increase fixed income and appropriate risk balance.
Disadvantages of LQD: Although credit risk is relatively low, an economic downturn or worsening financial situation of individual companies may result in credit downgrades, affecting LQD performance. In addition, the credit risk of corporate bonds is always present compared to government bonds.
HYG Securities ETF-iShares Iboxx $ High Yield Corporate Bond Etf
HYG（$Ishares Iboxx $ High Yield Corporate Bond Etf(HYG.US)$) is a high-yield corporate bond ETF that invests in the non-investment grade or “junk bond” market. These bonds typically come from companies with lower credit ratings, but they offer higher box office rates to attract investors.
HYG's advantages: HYG provides investors with higher earnings submergence of investment-grade bonds, which can be a major source of increased portfolio earnings when the interest rate environment diverges.
Disadvantages of HYG: The credit risk of high-yield bonds is higher, especially during economic downturns, where the risk of default increases significantly. In addition, volatility is relatively high due to its price sensitivity to market sentiment and interest rate changes. Under adverse conditions, the value of such bonds may shrink significantly.
Bond ETF Tax Issues
Non-US tax resident investors are not subject to capital gains tax levied by the US. If non-US tax resident investors hold US bonds directly, no interest tax is required, whether US Treasury bonds, local government bonds, or ordinary corporate bonds.
However, if it is a US bond held through a bond fund or bond ETF, the interest paid by that fund or ETF is treated as dividends and is subject to tax at the rate of the dividend tax.
Regarding the tax on livestock and the tax refund procedure of Futubull, you can refer to the official teaching:ETF Tax Refund Guide
How to Trade Bond ETFs?
Before investing in (buying) ETFs, you first need to set up a securities account. If you store money in a bank, you need to open a bank account first.
Securities Account Opening Process
Step 1: Head over to the Futubull network and sign up for a new account.(Register now)
Step 2: Open a securities account on the basis of the Futu account.(Open account now)
Step 3: Fill in your personal and financial details (includingBank Code and Account Number), and then deposit funds via EdDA Quick Deposit, Fast Transfer (FPS), Bank Transfer.(Invest immediately)
Step 4: Download the Futubull Customer Portal and log in.(Download now)
