What is Fixed Income? (Plain English Definition)
Definition: Fixed income refers to investments that provide regular, predictable interest payments, primarily bonds and bond-like securities.
Fixed Income Explained Simply
Fixed income is a broad category of investments that pay regular, relatively predictable income. Bonds are the most common fixed-income investment, but the category also includes certificates of deposit (CDs), money market instruments, and preferred stocks. The term comes from the fact that most bonds pay a fixed interest rate (coupon) throughout their life.
Fixed-income investments serve several roles in a portfolio. They provide regular income, preserve capital, and reduce overall portfolio volatility. When stock markets decline sharply, high-quality bonds often hold steady or rise in value, providing a cushion for your portfolio. This is why financial advisors recommend holding a mix of stocks and bonds.
Fixed-income ETFs have made bond investing accessible to ordinary investors. Before bond ETFs existed, investing in bonds was complicated and expensive -- individual bonds often had minimum purchase amounts of $5,000 to $10,000, and the bond market was opaque with wide bid-ask spreads. Bond ETFs let you invest any amount in a diversified portfolio of hundreds or thousands of bonds at low cost.
Fixed Income Example
The iShares Core U.S. Aggregate Bond ETF (AGG) provides exposure to the entire U.S. investment-grade bond market -- over 10,000 individual bonds -- for an expense ratio of just 0.03%. A $20,000 investment in AGG might yield about 4.5% annually, providing roughly $900 per year in income distributed monthly. This income is far more predictable than stock dividends, which is why it is called fixed income.
Why Fixed Income Matters for ETF Investors
Fixed-income ETFs are the foundation of the defensive portion of any portfolio. They provide stability and income that help you stay invested during stock market turbulence. Without bonds to cushion declines, many investors would panic-sell during crashes and lock in permanent losses. For ETF investors, fixed-income exposure should grow as you age and your time horizon shortens. A common guideline is to hold your age in bonds as a percentage -- a 40-year-old might hold 40% in bond ETFs. While this is just a starting point, the principle of increasing fixed income as you approach retirement is widely accepted by financial professionals.
Fixed Income vs Bond
| Fixed Income | Bond |
|---|---|
| Fixed income refers to investments that provide regular, predictable interest payments, primarily bonds and bond-like securities. | See full definition of Bond |
While fixed income and bond are related concepts, they serve different purposes in the world of ETF investing. Understanding both terms helps you make more informed decisions about which funds to include in your portfolio and how to evaluate their performance.
Related Terms
Deepen your understanding of ETF investing by exploring these related concepts:
Bond
A bond is a fixed-income investment where you lend money to a government or corporation in exchange for regular interest payments and the return of principal at maturity.
Equity
Equity represents ownership in a company through shares of stock, or more broadly, the value of an asset after subtracting any debts owed on it.
Asset Allocation
Asset allocation is the strategy of dividing your investment portfolio among different asset categories like stocks, bonds, and cash.
Duration
Duration measures a bond or bond fund's sensitivity to interest rate changes, expressed in years -- the higher the duration, the more the price moves when rates change.
Treasury Bond
A Treasury bond is a debt security issued by the U.S. government with a maturity of more than 10 years, considered one of the safest investments in the world.
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