The link makes the argument that what the above paragraph states is a myth.
The conclusion of that article is:Low cost bond index funds provide professional management with very low costs. In return for paying as little as 14 basis points (0.14%) annually, you get diversification and liquidity.
Why would I pay someone 14 basis points for something I can do myself?
Liquidity? If rates are rising, the liquidity results in selling into a depressed NAV. Why would I want to do that when I can wait a short time until one of my ladder rungs pays me 100 cents on the dollar for my mature bond.
During accumulation years, my opinion is that bond funds (or ETF's) are fine, but in retirement, as soon as you need more cash than the fund can provide, the NAV becomes a concern. The impact of rising rates is a risk if you need any capital for income. Real bonds kept to maturity don't suffer this problem. If you require more income than the coupons from your ladder throws off, then at each maturity draw cash at 100 cents on the dollar. There's a defined exit point with real bonds and you're able to plan.
It's fine to ignore the dropping NAV of a fund (that is inevitable as rates rise) if you only require the income produced by the fund, but if not, you'll be selling depressed units and taking a loss that could go on for years, depending on the duration of the fund. When RRIF withdrawals become a reality, the bond funds can be a problem.
I understand the allure of the fund. I can think of quite a few advantages.
1. They have the advantage of automatic reinvestment of distributions, freeing you from having to find a home for the coupons that are thrown off by real bonds. During accumulation, this is a bonus.
2. Your hands aren't tied waiting for a real bonds maturity date to get some quick cash.
3. Funds have the advantage of offering the ability to sell small quantities to generate cash.
4. Short term funds have quick recovery from interest rate increases and they can give you that exposure to a collection of corporate bonds, since many short term funds use corporates to lift their yields.
5. Low price of admission for the small investor. Real bonds aren't really worth buying under $10K.
6. If you use funds for income, you don't care about the NAV as long as capital isn't required..
But I can also come up with advantages that real bonds have over funds too. I think they win out, especially in retirement, and when you're faced with an aggressive withdrawal requirement in a RRIF.
1. I get a defined rate of return and a known principle at maturity. I don't care about NAVs since a couple times a year a bond matures with its face value. I take the cash I need and repurchase a new bond at the rates of the day.
2. Why pay someone to do something you can do yourself at less cost.
3. I can control the duration of my holdings.
4. I control any capital gain liabilities.