For beginners, it is advisable to familiarize themselves with three types of bonds: U.S. Treasuries, investment-grade bonds, and emerging market bonds.
Previously, we mentioned that individual bonds have high purchasing costs, making them less suitable for beginner investors. Next, we will delve into bond ETFs to explain this point.
1. U.S. Treasuries
Treasuries are among the safest investment instruments globally, and beginners must be familiar with them. U.S. Treasuries are not only suitable for beginner investors but are considered for everyone.
As the global economic center, the United States is perceived as having bonds that will not default, making U.S. Treasuries a highly significant asset in investment. When the financial industry discusses government bonds, it often refers to U.S. Treasuries.
U.S. Treasuries possess a robust risk-resistant nature, and their interest rates are regarded as benchmark rates.
2. Investment Grade Bonds
Investment-grade bonds refer to public or corporate bonds with higher credit ratings. While they take a slightly higher risk than U.S. Treasuries, they are still relatively secure overall, making them suitable for beginners.
Classified by risk ratings, investment-grade bonds can be further divided into investment-grade bonds and junk bonds. Those rated BBB or higher, or BAA and above, are considered investment-grade bonds, while those rated below are termed junk bonds (or high-yield bonds).
Investment Grade Bonds ETFs, based on the type of underlying assets, can be classified into diversified bonds (government bonds + corporate bonds) and pure corporate bonds. The Investment Grade Corporate Bond category often includes bonds issued by companies selected from the S&P 500, representing the top 500 global enterprises. These bonds are relatively less prone to issues.
3. Emerging Market Bonds
Emerging Market Bonds, or EM bonds, also known as emerging market fixed income, refer to public or corporate bonds issued by developing countries. Typically, corporate bonds within this category are often from state-owned enterprises or major stocks in that country.
The primary profit from emerging market bonds comes from credit spreads. Investors demand higher returns as they assume the higher default risk associated with emerging markets.
One of the significant risks of emerging market bonds is sovereign default, which is particularly concentrated in Latin America and less developed countries. Once a default occurs, the probability of subsequent defaults increases. When investing in funds or ETFs, it's crucial to pay attention to the countries in which they are invested. Don't base your decision solely on the term "emerging markets" in the name.