Starting your investment journey can feel a bit like setting sail on vast, unknown waters. To give you some direction, let's navigate two common investment options: ETFs and bonds.

If you're a seasoned investor, you may have nodded knowingly at these terms. But if you're new to investing, these terms might feel like murky waters. You might also wonder which is best for your long-term investing strategy.

Both ETFs and bonds can align with financial independence goals, but each sails a different course. Every investment, be it bonds or ETFs, carries its own set of risks and rewards.

So, let's break it down in simple terms and find out which vessel suits your journey best. Time to set sail!

What are ETFs?

ETFs (or exchange-traded funds) are like having a mini-portfolio within a single holding. When you buy an ETF, you're buying a mix of different investments. These could be stocks, bonds, or other asset classes.

ETFs are also traded on the stock market, just like individual stocks. This means their prices can go up and down throughout the day, based on what people are willing to pay for them.

Within the world of ETFs, there's a variety to choose from, including bond ETFs, equity ETFs, preferred stock ETFs and income ETFs. Investing in an ETF can give your portfolio exposure to different parts of the market without having to buy each stock or bond individually.

What are some key features of ETFs?

Let's explore some of the stand-out features of ETFs:

1. Diversification. In this context, diversification means you can spread your investment across various types of assets, companies, industries or countries. Instead of putting all your money into one stock or bond, an ETF allows you to invest in a range of stocks, bonds, and other assets all at once. This can help reduce risk – if one investment isn't performing well, others in the ETF might offset it with stronger performance.
2. Market exposure. When invested in an ETF, you can get exposure to different parts of the market. There's an ETF for almost every investment type – like equity ETFs, bond ETFs, and even specific industries or regions. This means you can invest in a wide array of areas.
3. Trading flexibility. An ETF investment offers flexibility in trading. Unlike mutual funds, which are traded only once at the end of the day, an ETF can be bought and sold throughout the trading day.

Some popular ETFs in Australia

1. Vanguard Australian Shares Index ETF. This ETF is like a big basket that holds shares from various top companies in Australia, specifically tracking the ASX 300 Index. It's a popular way to invest in a wide slice of the Australian market, all at once. If you're keen on having a piece of many Australian companies, including big names like BHP and CBA, this could be an ETF for your investment portfolio.
2. iShares S&P 500 ETF. This one takes you across the ocean to the United States. It tracks the S&P 500 Index, which means it holds stocks from 500 of the largest companies in the US. It's a sound option if you want to dip your toes into the American market and own a part of well-known companies like Apple or Microsoft.
3. BetaShares Australia 200 ETF . Similar to the Vanguard ETF but with a focus on the top 200 Australian companies, this ETF follows the performance of the ASX 200 Index. It's known for having lower management fees, which is a plus if you're looking to save on costs.

Each ETF offers a way to invest in a range of companies without having to choose individual stocks. They're an easy way to gain exposure to different sectors and companies.

Whether you're a new or seasoned investor, an ETF could be a suitable addition to your portfolio. They offer a simple way to diversify your investments and get involved in different markets, all with the flexibility of being able to buy and sell when you want.

What are bonds?

Think of bonds like bank loans – but you're the lender (or one of the lenders), not the borrower. When you buy a bond, you're lending money to whoever issued the bond, like a government or company. In return, they agree to pay you back the full amount on a specific date (that's called the bond's maturity date) and pay you interest along the way.

A bond is considered a "fixed income" investment type. That's because you're paid interest at a fixed rate. For some investors, this serves as a predictable income source, which can be comforting. The interest rate on a bond is often called the "coupon rate," and it’s usually set when the bond is issued.

Now, you might come across different bonds, like government bonds (issued by the government) or corporate bonds (issued by companies). Earlier, we also mentioned bond ETFs, which are like baskets of different bonds you can buy shares of. And then there are bond mutual funds, similar to bond ETFs but managed by professionals.

What are some key features of bonds?

Now let's look at some key features of bonds:

1. Fixed income. When you hear "fixed income" in relation to bonds, it means you get regular interest payments. Imagine you lend money to a friend, and they agree to pay a little bit back every month. The company or government you lend money to (by buying their bond) agrees to pay you interest at a set rate and schedule. This could happen every quarter, six months, or another frequency.
2. Maturity dates. Every bond has a maturity date. This is the date when the bond 'expires', and the issuer (the one who borrowed your money) has to pay back the full amount you lent them.
3. Credit risk. Credit risk is about judging how likely it is that the issuer of the bond might not be able to pay you back. If it's a stable government or a big, high-performing company with longevity, the risk is usually lower. But if it's a new company or one that's struggling financially, there's a higher risk. It's important to assess how much risk you're willing to take on before deciding which type of bond you want to invest in.

Some popular bonds in Australia

1. Australian Government Bonds (AGBs) . Just like it sounds, these bonds are issued by the Australian Government. They're a popular choice because they've historically been considered safe. When you buy an AGB, you're lending money to the government, and they promise to pay you back with interest on specific dates.
2. State Government Bonds. These bonds are similar to Australian Government Bonds, but are issued by individual states like New South Wales or Victoria. Investing in these means you're lending money to a state government. They're also considered pretty safe and reliable, just like the federal government bonds, but with local interests.
3. ANZ Bank Corporate Bond . Short for Australia and New Zealand Banking Group Limited, ANZ is a big player in the banking world. They offer a range of banking services, from regular banking to mortgage lending, and even life insurance.

Bonds generally offer a steadier, more reliable path than ETFs and stocks. If you're an investor who prefers to take on minimal risk, investing in a bond can help to create some stability in your investment journey.

What are the key differences between ETFs and bonds?

Choosing between an ETF and an individual bond for long-term investing can feel like a big decision. Let's compare the key differences between ETFs and bonds in the following features:

Feature	ETFs	Bonds
Returns	ETFs can offer higher potential returns, especially equity ETFs.	Bonds generally offer lower returns but provide steady income through regular interest payments.
Risks	Higher risk due to market fluctuations, especially with equity ETFs.	Lower risk, especially with government bonds. Corporate bonds can have comparatively higher risk.
Diversification	ETFs provide a lot of diversification, as they can include a mix of different assets like stocks, bonds, and commodities.	Provide diversification mainly within the fixed income category, although a bond fund can hold a variety of bonds.
Liquidity	High liquidity. ETFs trade like stocks on exchanges, making them easy to buy and sell.	Level of liquidity varies. Individual bonds can be less liquid than ETFs, but bond ETFs and bond mutual funds are more liquid.
Fees	Generally lower fees than actively managed funds investing in bonds and stocks.	Fees can vary. Individual bonds might have lower fees, but bond funds and bond ETFs have management fees. Bond ETFs generally have lower fees than bond funds due to passive management.
Minimum investment	Lower minimum investment; depending on the share platform, they may begin from $500. However, some brokers offer fractional ETF shares (like Pearler Micro ), allowing investments from $5.	Bonds have higher minimum investments, usually $5,000 or more per bond. Because a large chunk of money is required to invest directly in bonds, it's typically preferred by institutional investors. Investing in bond funds can make this type of investment more accessible.

ETFs and bonds each have their unique features. It's like choosing the right tool for the job. Sometimes you want the versatility of an ETF, and other times the steady reliability of a bond.

But how can you know if you're making the right choice in deciding between investing in an ETF and a bond?

ETFs vs bonds: which one should I choose?

As a budding investor, it's normal to feel puzzled when deciding where to put your money for the long haul. You might worry about missing out on the potential growth offered by ETFs. On the flip side, the steady income and lower risk of individual bonds or bond mutual funds might sound like a safer bet.

Both have their perks, but which one suits you best? How do you know which one is right for you?

Well, both ETFs and bonds can allow for diversification, with a wide range of options to choose from. You can also invest in either an ETF or a bond at lower fees than some other investment types.

If you're not sure, try articulating your long-term investing goals. How much risk are you willing to take on? Is easy access to your funds important to you? Are you looking for a proposed fixed rate of return, or prepared for returns that'll either grow or sink with market conditions? By answering these questions, you may feel better equipped to make your investing decisions.

Remember, ETFs and bonds aren't mutually exclusive. It's not necessarily about choosing one over the other – having a bit of both can also be an effective investment strategy. ETFs and bonds each serve different purposes in your investment portfolio. Or, depending on your goals, you may choose neither. It's all about finding the right target asset mix for your portfolio, and the right approach for your preferences.

In the end, everyone's financial situation and comfort with risk are different. Before making any decisions, it’s always a good idea to do some research. A great way to start this journey is by reading investor website content. If you're looking for personalised advice, you can talk to a licensed financial adviser.

ETFs vs bonds: finding your balance in the investment landscape

And there you have it – a friendly guide through the world of ETFs and bonds, especially for those at the start of their long-term investing journey.

Remember, the choice between ETFs and individual bonds isn't a strict one-way road; it's more like navigating a diverse landscape. For long-term investors, both can have a place in your portfolio.

Your investment choices should align with your personal financial goals, risk tolerance, and time horizon. It's not about choosing ETFs or bonds exclusively but rather understanding how each can play a role in achieving your financial goals.

As you continue your investment journey, keep educating yourself. Consult with a financial adviser or join discussions on forums like the Pearler Exchange . The more informed you are, the better prepared you'll be to make decisions that suit your unique investing journey.

So, take what you've learned about ETFs and bonds and use it to cultivate a portfolio that grows with you over time.

Happy investing!