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Written by Beau Jordan on February 1, 2022
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6 Best Brokerages For Bond Purchasing In 2022

There is no doubt that investing in the stock market carries risk. In 2022 it is difficult to find a financial news outlet that is not reporting on increased volatility and risk in the market. However, the beauty of the equity markets is that you can play the game however you want. 

Traditionally, the more stocks you have in your investing portfolio, the more risky the portfolio. Of course this can all depend on the type of stocks you are investing in but historically that sentiment rings true. 

For those looking for a less risky and more diversified portfolio, they will often add bonds to the mix of their portfolio. The higher percentage of portfolio balance allocated to bonds, the less risky the investment becomes. 

Target retirement funds are a perfect example of this concept. These funds are actively managed and the closer time gets to the goal retirement date, the higher percentage of bonds are included in the portfolio. Year after year, that percentage increases. 

This is not to say there is no risk in investing in bonds. Any type of trade and investment carries risk. The risks for bonds are different from the risks that accompany stocks though. 

What is a Bond?

Simply put, bonds are institutional loans where you lend out your money to an institution (common institutions are the government and corporations) and receive interest payments in return. 

In addition to interest payments, it is expected that once the term of the bond expires the investor is paid back in full the initial loaned amount. 

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Key Bond Terms to Understand

It is important to understand some key terms while searching for bond investments. Even if you end up investing in bonds through ETFs or mutual funds, it is still important to understand how bonds work. Knowledge fuels results. 

The first term that you will see is the face value of the bond. This is the amount of money that the bond will be worth at maturity. Additionally, this is the amount of money that you will loan to the institution up front. 

It is expected that upon maturity, you will receive 100% of the face value of the bond. However, there are risks that the issuer (the institution) defaults on the bond and cannot pay you back.

Another term that is important to understand is coupon payments. The coupon payments are determined by the annual interest rate on the bond (coupon rate). The coupon payment amount is a percentage of the face value to be paid to you from issue date to maturity. 

A simple way to think of these coupon payments is that they are the interest payments the institution pays you for borrowing your money. 

One final term to understand is the maturity date. This is the date the bond is supposed to be fully paid back to the investor. 

There are more terms regarding bonds than the face value, coupon payments, and maturity date. However, these three terms are absolutely vital to understand when looking into investing in bonds. 

Types of Bonds

There are three main types of bonds: Corporate, Municipal, and US Treasury Bonds. 

Corporate Bonds

Corporate bonds are debt securities issued by corporations (either public or private). Typically, these bonds carry the highest amount of risk since there are higher chances the company will not pay you back. 

As a result, corporate bonds often have the highest interest rates (meaning you make more money). 

Municipal Bonds

Municipal bonds are debt securities issued by local government entities up to the state level. Some of these government entities include counties, cities, and states. Although less risky than corporate bonds, municipal bonds have a higher rate of default than federal bonds. 

Municipal bonds can typically be categorized as general obligation bonds, revenue bonds, or conduit bonds. 

  • Obligation bonds are not collateralized with assets. Instead, the government entity has the power to tax residents to pay bond holders. 
  • Revenue bonds are backed by government earned revenue (like tolls or lease fees). This is typically the method by which the bond investor receives coupon payments.
  • Conduit bonds are typically government issued bonds on behalf of private entities like hospitals or non-profit colleges. 

US Treasuries Bonds

U.S. Treasuries bonds are issued on behalf of the federal government. These bonds are traditionally seen as the least risky of bond investments. 

U.S. Treasuries bonds can typically be categorized as treasury bills, notes, bonds, and TIPS. 

  • Treasury bills are short-term securities varying in maturity from 52 weeks down to a few days. 
  • Notes are long-term securities that typically mature within 10 years. 
  • Bonds are also long-term securities that pay interest every 6 months and mature in 30 years. 
  • TIPS is short for treasury inflation-protected securities. These U.S. Treasuries bonds have a principal that is adjusted based on the CPI (consumer price index). TIPS have varying dates of maturity (5, 10, and 30 years), and pay interest every 6 months. 

Bond Returns

To drive home the bond terminology and offerings, below is an example of a bond investment and potential returns. 

As the investor, you decide to invest in a bond with a face value of $1,000 that has a maturity of 10 years and coupon rate of 5%. 

The first step is to purchase the bond for $1,000 (the face value). Then over the next 10 years you will receive $50 every single year (coupon payments). Finally, at the end of the 10 years you will receive the $1,000 (face value) back from the bond issuer. 

Typically, bonds are a win for the investor and a win for the bond issuer. 

Pros and Cons of Bonds

As with any investment, there are pros and cons to trading bonds. Perhaps the biggest pro is that bonds are viewed as a more predictable and stable form of investment. 

Bonds provide the investor with regularly scheduled coupon payments. Additionally, at the end of the maturity period the investor is rewarded with the return of the invested principal. 

One final major pro of bonds is that investors are able to select bond investments based on the amount of risk they want in their portfolio. Bond issuers are assigned credit ratings (better credit rating means there is a lower chance of company default). 

Investors can choose to invest in bonds with companies or organizations with high credit ratings as these carry less risk. However, companies with high credit ratings typically will offer a lower coupon rate because the bonds are considered safer. 

What are the Cons?

Although there are many benefits to trading bonds, there are a few key risks to consider. The main risk is the issuer risk of default. 

Coupon payments and principal payback are not guaranteed with bond investments. There is a chance that the bond issuer will default on those payments leaving the investor with nothing. 

Additionally, bonds can carry another risk called interest rate risk. Interest rates impact the price of the bond if the investor sells before maturity. However, if you hold the bond until maturity interest rate risk is irrelevant. 

If interest rates increased since you purchased the bond, that indicates that coupon payments are higher for bonds sold more recently. Remember that if you are then selling your bond on the secondary market, your bond would have lower coupon payments than the market average. 

To get someone to purchase your bond from you, you would need to sell the bond at a discount of what you paid for the bond to attract buyers. In essence since your bond has lower coupon payments, the price of the bond decreases.

Of course, interest rate risk can go both ways and an investor may benefit from the opposite scenario. 

Best Brokerages For Bond Purchasing

The below list of bond brokerages is not meant to be an all inclusive list. However, this list can be considered a starter list of brokerages that have proven success in the bond market. 

1. M1 Finance

A brokerage that has gained in popularity over the past few years is M1 Finance. M1 Finance enables investors to create investment pies that perfectly match the investors desired level of risk and exposure. 

Within each pie, the investor can choose specific ETFs or individual stocks to make up the entire pie (think of a pie chart). While you can have an unlimited number of pies, each pie is limited to 100 holdings. 

M1 Finance Bond Purchase Offerings

There are two main ways to purchase bonds on M1 Finance. Each method of purchase is split between custom pies and expert pies. 

A custom pie is one where the investor chooses individual stocks and ETFs to build both long-term and short-term portfolios. There are no fees for creating custom pies. 

While many brokerages will offer the ability to purchase individual bonds, M1 Finance does not currently have that offering. However, investors have the ability to invest in bonds through bond ETFs (exchange-traded funds). Each bond ETF contains a group of bonds. 

Investors have the capability within a custom pie to add as many bond ETFs to their pie as desired.

An expert pie is a professionally designed pie from the M1 Finance team. The goal of these pies is to help investors find already created pies that match their desired risk and industry diversification. There are no fees for using expert pies. 

Like custom pies, expert pies do not offer the purchase of individual bonds. However, there are expert pies that have been created that contain bond ETFs with numerous types of bonds. 

M1 Finance Fees

Fortunately, M1 Finance does not charge any commission fees for bond ETFs in both custom and expert pies. This commission free trading is the same for buying and selling the bond ETFs. 

Additional M1 Finance Highlights

One main expert pie category worth calling out is in the Just Stocks & Bonds section of expert pies. Here, the investor has the ability to choose portfolios that have a certain percentage mix of bonds and a certain percentage mix of stocks. 

For example, one expert pie is M1’s 20/80 pie that contains 80% stocks and 20% bonds. This type of pie enables investors to increase or decrease the risk of the portfolio by increasing or decreasing the bond mix. 

2. Charles Schwab

Charles Schwab is a traditional brokerage that provides investors numerous bond investing opportunities. In addition to bonds alone, Charles Schwab also offers investors access to CDs and other fixed income for further diversification. 

Charles Schwab Bond Purchase Offerings

Charles Schwab offers investors access to over 50,000 bonds that are coming from over 200 dealers from across the marketplace.

It is important to connect the number of bonds offered to the number of dealers. Dealers can offer different types of bonds with different amounts of risk. This allows investors to screen many offerings before making a decision. 

Charles Schwab also offers investors access to over 800 bond funds and ETFs. While bond funds and bond ETFs are very similar, bond funds are typically more actively managed and thus have a higher expense ratio (fee for the fund management not a commission for the brokerage).

Charles Schwab Fees

Charles Schwab has low and transparent pricing. Typically there is no fee for newly issued bonds but secondary bond trades are $1 per bond (this fee is not active for Treasury buys or sells). 

If the bond fund is a Charles Schwab mutual fund then there is no transaction fee. All listed ETFs on the Charles Schwab website are also free from commission fees (even third-party listed ETFs). 

Additional Charles Schwab Highlights

On the official Charles Schwab website, there is a plethora of information educating investors on fixed income and individual bonds. 

Investors also have the ability to create bond ladders using Charles Schwab’s CD & Treasury Ladder Builder. A bond ladder is a portfolio of bonds that mature on different dates. This helps investors manage interest rate risks and manage fixed income cash flow. 

Lastly, Charles Schwab offers a free fixed income (bonds included) review. Just by calling an income specialist, Charles Schwab can help you better understand your entire investment portfolio. 

3. TD Ameritrade

TD Ameritrade is a brokerage that is set out on differentiating itself by providing investors with world-class investment tools. This is evident through platforms like Thinkorswim where investors can quickly purchase stocks, options, and ETFs. 

TD Ameritrade Bond Purchase Offerings

Investors have access to over 40,000 bond offerings coming from over 100 dealers. As far as mutual funds and ETFs, TD Ameritrade has over 3,000 bond mutual funds and over 300 bond ETFs. 

TD Ameritrade investors have access to a wide variety of fixed income new issue choices. Some of these bond offerings include treasury securities, agency bonds, corporate bonds, and municipal bonds. 

TD Ameritrade Fees

For pricing, TD Ameritrade is very similar to other brokerages. If the investor is purchasing one of TD Ameritrade’s bond ETFs or bond mutual funds there is no commission fee. However, there is a $1 transaction fee on secondary bond trades. 

Additional TD Ameritrade Highlights

The biggest differentiator for TD Ameritrade is the investing tools that the brokerage has provided investors with. All bond related tools are free and TD Ameritrade provides access to Bond Wizard. 

Bond Wizard is a step by step process created to take investors from a questionnaire to bond purchase. Included in this tool is the ability to create a bond ladder. 

TD Ameritrade also offers a portfolio review from fixed income specialists.

4. Fidelity

Fidelity is a very well known and popular brokerage. While the majority of users appreciate Fidelity for its stock and retirement offerings, Fidelity also has competitive bond offerings. 

Fidelity Bond Purchase Offerings

Fidelity offers investors access to over 75,000 individual bonds, bond funds, and professionally managed portfolios. These bond offerings include treasury bonds, municipal bonds, and corporate bonds as well as a few others. 

Additional bond offerings include the access to bond ETFs, mutual funds, and money market funds. Money market funds are specific short-term fixed income investments. 

Fidelity Fees

Fidelity advertises transparency across the trading platform. With that in mind, they charge a flat rate $1 fee for any online bond transaction.

All bond ETF purchases are commission fee and Fidelity has a wide array of bond mutual funds that are also commission free (however there are some that are not). 

Additional Fidelity Highlights

Fixed income investors who meet a minimum account balance in their Fidelity account have access to Fidelity Fixed Income Specialists. These specialists are to help guide, educate, and help the investor succeed. 

Additionally, investors with a minimum balance average of $250k have access to a wealth management team at Fidelity. This team has a dedicated advisor actively keeping track of your account. 

With a minimum balance of $350k Fidelity allows investors to open up fixed income managed accounts. Within these accounts, Fidelity helps professionally build out strategies specifically for fixed income investors. 

For no additional charge, all investors have access to Fidelity’s wide range of educational booklets, videos, and trainings.

5. Vanguard

Vanguard is known for consistently lowering investment costs to put more money in the pockets of the investor. One way that Vanguard does this is by creating a plethora of Vanguard mutual funds that are free of commissions. 

Vanguard Bond Purchase Offerings

Although Vanguard does not easily list the total number of bonds offered like many other brokerages do, Vanguard offers clients the ability to invest directly in bonds. However, Vanguard is best known for its extensive list of Vanguard bond mutual funds. 

In addition to bond funds, Vanguard has a vast list of ETF offerings. These ETFs are created by Vanguard as well as other third-party companies. 

Vanguard Fees

Whenever an investor invests in a Vanguard fund or ETF, it is commission free. This is a huge advantage for investors as Vanguard has an impressive list of ETFs and mutual funds. Even if an ETF is not a Vanguard ETF, the platform is still commission free. 

Just as the majority of other brokerages mentioned, Vanguard also charges a $1 transaction fee for secondary market bond purchases. Newly issued bonds on the other hand do not have a transaction fee and U.S. Treasury securities are also free in secondary market trades. 

Additional Vanguard Highlights

As previously mentioned, Vanguard has one of the largest selections of owned mutual funds and ETFs. 

Vanguard has tracked how Vanguard bond funds have performed over the past 10 years compared to competitors. 82% of Vanguard owned bond funds (which are commission free to Vanguard investors) outperform their peer averages. 

6. E*Trade

The final bond trading brokerage to highlight is E*Trade. E*Trade has gained a reputation for its easy to use trading platform. This platform makes it easy to understand bond offerings before investing. 

E*Trade Bond Purchase Offerings

E*Trade offers bond investors access to over 50,000 bonds from over 200 different providers. In addition to direct access to individual bond offerings, E*Trade offers investors access to bond ETFs and bond funds. 

These bond offerings include treasury bonds, municipal bonds, and corporate bonds as well as a few others. 

E*Trade Fees

As with the other investment platforms discussed, E*Trade also puts an emphasis on transparent fees. New bond trades are commission free and bonds on the secondary market have a $1 transaction fee (much like the industry standard). 

E*Trade also offers an extensive list of 3rd party market and fixed income analysis free of charge. This means that the investor truly has the power to understand the risks present in any bond investment before fully investing. 

Additional E*Trade Highlights

E*Trade offers sellers bond ladder support as well as individual support from E*Trade Fixed Income Specialists. These specialists are authorized to provide you with buy/sell recommendations as well as support on your individual portfolio and bond ladder. 

Best Brokerages For Bond Purchasing 2022: Summary

This article discussed the basics of bonds and the key terminology surrounding bonds. A few key terms to remember are the face value of the bond, the coupon payments, and the maturity date of the bond. 

In addition to terminology and investment definitions, investors learned about the different types of bonds offered across the marketplace. As a reminder, these include corporate bonds, municipal bonds, and U.S. Treasury bonds. Each bond class has unique risks and benefits. 

Lastly, there were six brokerages described to help you decide where to invest in bonds. M1 Finance, Charles Schwab, TD Ameritrade, Fidelity, Vanguard, and E*Trade are all great bond trading brokerages that offer unique trading benefits to investors. 

Hopefully this article has highlighted that each investment platform has its benefits. Whether you are looking for a platform to invest in bond funds or looking to purchase individual funds, the above brokerages can meet your needs. 

If any of the brokerages discussed in this article seem interesting to you, head over to their website and see if creating an account is right for you!

Article written by Beau Jordan

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