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UBS experts share their insights Fixed income

Particularly during periods of continued market uncertainty, Bonds can give a portfolio the added stability the investor wants. That’s why investors in search of peace of mind are increasingly adding bonds to their investment mix while at the same time broadly diversifying their portfolio. However, cost-effective implementation is key.

The reason becomes readily apparent if return is defined as the performance of an investment strategy, minus the cost of its implementation. Therefore, investments with a competitive cost structure give investors a return advantage right from the outset. This is especially true for asset classes such as bonds, which promise considerable security but few if any high returns.

Return advantage through cost benefits

The minimal drag on the cost side is one of the reasons for the increasing popularity of ETFs as a fixed income investment solution: They are passively managed index funds that have not only low management fees but also low transaction costs. As bonds are typically classified in given maturity ranges, this carries a particular weight vis-à-vis direct investment: Exchange traded funds incur no rebalancing and reweighting costs. Additional benefits of ETFs are their high liquidity and their flexible stock exchange / OTC tradability.

UBS offers a broad range of ETFs on government bonds issued by various countries, as well as ETFs on a broadly diversified basket of corporate bonds.

Bonds are generally considered safer than equities because if an issuer defaults it must pay its bondholders before it pays its shareholders, but the level of risk depends on the type of bond. For example, holding corporate bonds will deliver higher returns than holding government bonds, but they associate with a greater risk reflecting an increased risk of payment due to a corporate default. In general, all bonds are subject to interest rate risk, liquidity risk, inflation risk, default risk, and rating downgrades.