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ETFs 105: Exchange-Traded Funds and Fixed Income

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1.
When you buy a fixed-income ETF that focuses on a particular type of bond, you expose yourself to additional risks.
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True. As a rule, a limited focus opens up a new field of risks.
2.
Why do bond ETFs trade at premiums or discounts to net asset value?
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The lower liquidity of the bond market makes it difficult keep the price exactly at the ETF's net asset value. The bond market's reduced liquidity makes it difficult for arbitragers to keep the ETF price exactly on the net asset value.
3.
Individual bonds trade on the exchange like ETFs?
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False. Bonds are traded on the over-the-counter market.
4.
Which exchange-traded fund is exposed to more risk?
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An emerging-markets-bond ETF that hold 10-15 years to maturity. Emerging-markets bonds are one of the most volatile asset classes, and long-maturity bonds carry the most interest-rate risk.
5.
When you invest in a broad-based bond ETF, one result is reduced risk. This is due to _______.
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Diversification. As a rule, a broad base will offer diversification, which generally reduces risk.