The Corporate Bond Wars: Cost

Here is Larry Denham opinion about Cost. He gives the advantage to Individual bondholders.

Bond Funds: A bond fund may be purchased online through a brokerage account; and investors pay annual management fees and bond fund expenses. Shop carefully because these fees and expenses can range from .25% to 1.25%. A word of caution: depending on the bond fund selected, there can also be an up-front sales commission (load) charged (loads typically range from 2% to 4%) on the amount invested.

Individual Bonds: Traditionally, the cost of purchasing an individual bond was either the broker’s commission or an unknown (to the investor) mark up on the price of the bond. Now individual bonds may be purchased online for an exact price at a flat commission per trade (for example: $10.95 per transaction with Zion’s Direct. Full Disclosure: Zion’s Direct is a non-bank subsidiary of Zion’s Bank, where I am a SVP and business development officer.), regardless of the dollar amount of the transaction. Online brokerage websites offer thousands of bonds representing the secondary market inventory of many broker/dealers. After individual bonds are purchased they are held in individual brokerage accounts and principal and interest is received, call redemptions (if any) are automatically processed and year-end tax information is provided.

In my opinion, there is no question that the individual bond investor has the advantage here. I have seen people receive a negative return on their bond fund while the portfolio received a positive return. This was all due to cost of doing Investor business with the fund.