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May 16, 2024

Tony Miano, CFA, Investment Strategy Analyst

Luis Alvarado, Investment Strategist

Dianna Lin, CFA, Senior Investment Analyst

Individual bonds or bond funds, what should I own?

For many investors, owning bonds is an important component of their investment portfolio. However, deciding which bonds to pick can sometimes present challenges as there are many options to choose from. Bonds are issued by governments or businesses with different credit ratings, maturity dates, coupon payments, or legally imposed limits for the issuer. Purchasing the actual bonds can also have its own nuances, depending on if investors use a brokerage account or if they purchase directly from the issuer (for example, direct from the U.S. Treasury). To avoid some of the differences among individual bonds, investors may choose to invest in pooled investment vehicles such as mutual funds or exchange-traded funds (ETFs). There are pros and cons to each approach, and we believe that the answer as to which is preferable ultimately depends on an individual’s needs.

What are the differences?

A bond mutual fund or ETF (also referred to as a pooled vehicle) is a portfolio that can consist of potentially hundreds or thousands of different bonds with various maturities, yields, credit ratings, and other characteristics. A key difference between a pooled vehicle and individual bonds in an account is the former’s nature as a diversified basket of bonds. While this option may be highly diversified and can potentially lower the credit risk (risk of non-payment) from any individual bond, a fund may not fit a requirement for a specific maturity, yield, or credit rating.

Having a variety of maturities and coupons means that a bond fund has more variability in terms of yield and does not have a definite maturity date for return of principal. An individual bond held to maturity will pay back its principal regardless of the value of the bond between its purchase and maturity date, as long as the issuer does not default and fail to pay. Investors can also more easily implement strategies focusing on specific maturity dates by holding individual bonds, but it may be more difficult with most bond funds as these tend to be more diversified in their approaches to managing maturity schedules. Liquidity management, as a result, may be impacted.

There are also trading-related differences between the two approaches that should be taken into consideration. While U.S. Treasury bonds are comparatively liquid and easy to transact in, municipals, high-yield, or securitized bonds are less liquid and may be difficult for an individual investor to access. By investing in a pooled vehicle, investors may get access to types of bonds that are more difficult for an individual investor to obtain, with the added benefit of being able to sell shares daily. Institutional managers who manage bond funds may also get more favorable pricing than an individual when trading bonds, given their increased size and scale. Additionally, interest generated in bond funds can be reinvested quickly in more shares of the fund, while individual bond interest may not be reinvested until they meet the minimum for a new bond purchase.

Metrics Individual bonds Pooled vehicles
Ownership Full ownership of individual bonds, each with its own maturity and yield Partial ownership of hundreds of different bonds, each with different maturity and yield
Maturity date Defined maturity date and value (assuming the issuer does not default) regardless of market movement Generally, no defined maturity for repayment of principal; value goes up and down with the market
Portfolio characteristics Easier to implement strategies focusing on maturities; interest stays the same over the life of the bond Maturity mix can vary greatly; coupon can change over ownership period
Liquidity Harder to buy and sell specialized bonds; potentially no daily liquidity Better liquidity and access to specialized bonds; manager may have specialized skills
Management Active management at individual’s discretion Active management at fund manager’s discretion
Taxes More control over realization of taxes; each bond has individual tax lots Less control over realization of taxes in mutual funds; tax lots at the level of the fund
Fees Charged by the investment professional for management and for trading Charged by the managing firm and potentially by the investment professional

Source: Wells Fargo Investment Institute, as of May 16, 2024.

Differing management styles

The management of a portfolio comprised of individual bonds very often differs from the management of a bond mutual fund or ETF. With a portfolio made up of individual bonds, no changes will typically occur without the investor’s direction. A bond fund, however, may change at the discretion of the fund manager or, in the case of an index-tracking bond ETF, if any changes occur at the index level. With an individual bond portfolio, the individual manages the portfolio at the account level. Meanwhile, a bond fund is managed by an institutional portfolio manager. The manager of a bond fund may have access to a professional research team for more in-depth research, which may be beneficial in specialized sub-asset classes. However, the fund will also be managed more in line with the overall goals of the fund and not the individual investor.

Because the management of bond mutual funds and ETFs tends to impact their holdings over time, they are unable to lock in a specific interest rate. Individual bonds will generally pay the same semi-annual fixed interest up until maturity, but a bond fund will generally issue monthly payments (dividends) that may change depending upon the decisions made at the portfolio-manager level. Bond funds that receive inflows during environments of falling interest rates could see their yields decrease as cash inflows would have to be invested in bonds offering lower rates, but an individual bond’s interest rate would stay the same. Investors who need consistent payments coupled with a known maturity date may prefer individual bonds.

Differing management styles also impact tax consequences1, which are different for individual bonds, bond ETFs, and bond mutual funds. Bond mutual funds may be impacted by decisions from the manager or redemptions from other investors and may generate unanticipated capital gains or losses. In the case of individual bonds and ETFs, the individual investor’s tax lots are taken into consideration to a much greater extent, and the decision to sell one of those lots stays at the individual account level.


Mutual funds, ETFs, and individual bonds are all important options for investors, but careful consideration of the various pros and cons must be contemplated when building a bond portfolio. In conclusion, there is no single answer when it comes to how to invest in bonds, and it is important to speak with your investment professional to determine which strategy may best fit your goals.

1 Wells Fargo and its affiliates are not legal or tax advisors. Be sure to consult your own legal or tax advisor before taking any action that may involve tax consequences.

Risks Considerations

Each asset class has its own risk and return characteristics. The level of risk associated with a particular investment or asset class generally correlates with the level of return the investment or asset class might achieve. Bonds are subject to market, interest rate, price, credit/default, liquidity, inflation and other risks. Prices tend to be inversely affected by changes in interest rates. High yield (junk) bonds have lower credit ratings and are subject to greater risk of default and greater principal risk. Municipal bonds offer interest payments exempt from federal taxes, and potentially state and local income taxes. Municipal bonds are subject to credit risk and potentially the Alternative Minimum Tax (AMT). Quality varies widely depending on the specific issuer. Municipal securities are also subject to legislative and regulatory risk which is the risk that a change in the tax code could affect the value of taxable or tax-exempt interest income.

The investment return and principal value of a mutual fund will fluctuate and shares, when sold, may be worth more or less than their original cost.

Exchange-traded funds are subject to substantially the same risks as individual ownership of the securities would entail. Investment returns may fluctuate and are subject to market volatility, so that an investor’s shares, when redeemed, or sold, may be worth more or less than their original cost.

General Disclosures

Global Investment Strategy (GIS) is a division of Wells Fargo Investment Institute, Inc. (WFII). WFII is a registered investment adviser and wholly owned subsidiary of Wells Fargo Bank, N.A., a bank affiliate of Wells Fargo & Company.

The information in this report was prepared by Global Investment Strategy. Opinions represent GIS’ opinion as of the date of this report and are for general information purposes only and are not intended to predict or guarantee the future performance of any individual security, market sector or the markets generally. GIS does not undertake to advise you of any change in its opinions or the information contained in this report. Wells Fargo & Company affiliates may issue reports or have opinions that are inconsistent with, and reach different conclusions from, this report.

The information contained herein constitutes general information and is not directed to, designed for, or individually tailored to, any particular investor or potential investor. This report is not intended to be a client-specific suitability or best interest analysis or recommendation, an offer to participate in any investment, or a recommendation to buy, hold or sell securities. Do not use this report as the sole basis for investment decisions. Do not select an asset class or investment product based on performance alone. Consider all relevant information, including your existing portfolio, investment objectives, risk tolerance, liquidity needs and investment time horizon. The material contained herein has been prepared from sources and data we believe to be reliable but we make no guarantee to its accuracy or completeness.

Wells Fargo Advisors is registered with the U.S. Securities and Exchange Commission and the Financial Industry Regulatory Authority, but is not licensed or registered with any financial services regulatory authority outside of the U.S. Non-U.S. residents who maintain U.S.-based financial services account(s) with Wells Fargo Advisors may not be afforded certain protections conferred by legislation and regulations in their country of residence in respect of any investments, investment transactions or communications made with Wells Fargo Advisors.

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