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Hi Guys,

Brings up some interesting points in the debate!

I have been wrestling with the question of whether it is better for the retail investor to buy bonds directly or bond exchange-traded funds (ETFs). At this stage, I’m leaning toward bond ETFs as the best way to go for long-term horizons (e.g. retirement funds). Let me throw out some thoughts why. If anyone sees any flaws, let me know before I plunk some money down.

Let’s summarize what the proponents of direct ownership claim:

• individual bonds have maturity dates and offer certainty of returns if held to maturity, unlike bond ETFs

• commissions and management expense ratios (MERs) make bond ETFs more expensive than the commission paid to buy bonds over the counter from dealers.

OK, what to make of this. The first thing to get out of the way is how to do the comparison. Comparing a bond ETF to a single bond doesn’t fly with me. The bond ETF is diversified in terms of default and interest-rate risk, which is good. A single bond is not diversified on those criteria, which is not good. So the comparison, it seems to me, should be between the bond ETF and a diversified ladder of bonds.

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