In reality though, bond ETFs tend to trade at a premium when lots of investors are buying them, and at a discount when lots of investors are selling them. They suffer from a classic directional stampede effect, and while mutual funds have the same problem, at least the purchase and sale of their securities can be more thoughtful. This dynamic-the majority of investors buying at a premium and selling at a discount-is an undeniable black mark on fixed-income ETFs, making it difficult to advocate their use for a conservative and core allocation within a client's portfolio.

Additionally, it should be noted that the indices that many popular bond ETFs represent have been around for decades, and are nearly impossible to replicate. For example, a key fixed-income benchmark, the Barclays Capital U.S. Aggregate Bond Index, represents some 8,000 individual bonds, many of which are illiquid and trade infrequently.

So ETFs that try to deliver those exposures must partake in a representative sampling strategy, delivering a portfolio exhibiting similar risk/return characteristics to the broader benchmark. While this sampling strategy is also used by fund and individual bond portfolio managers, it can pose unique challenges to ETFs, especially when it forces purchases or sales of securities at points in time that may not be beneficial to the underlying shareholders.

The more active management strategy of fund and individual bond managers provides the flexibility to manage the rebalancing process more effectively based on market conditions.

In fact, many active managers seek to exploit this pitfall of bond ETFs, which because of the narrowly defined exposures they must maintain, are buying and selling securities at fairly predictable points in time. Indeed, it is not uncommon to see the prices of securities that are a mainstay of bond ETF portfolios get run up in the days before their rebalancing purchase transactions, or to see active managers dumping bonds that they know are falling out of the index sampling portfolio in advance of ETF selling.

Another problem with this index construction sampling is that most tend to either weight bonds by the market size of existing debt, meaning you automatically allocate more money to more indebted and risky issuers, or use credit ratings to determine an issuer's eligibility, which may or may not be reliable these days.

Admittedly, some of these same issues are also present with mutual fund and individual bond portfolio management, though it is less frequently the case. However, it is worth noting that constant ETF industry innovation means there are some new actively managed ETF products that seek to avoid these pitfalls. However, ETFs' biggest problem-the aforementioned issues with dislocations between NAV and share price-are here to stay.

At the end of the day, advisors and investors must weigh the benefits and drawbacks among the varying methods of garnering bond exposures and decide what is best for the client, being careful not to be lulled into the ease and trendiness of the current product proliferation cycle that have made ETFs a hot ticket item. A mutual fund might be a better choice, without the NAV and share price dislocation issues of ETFs, though they are usually more expensive, and sometimes less tax efficient, and intraday trading is not available.

Individual bonds provide a predictable income steam, as well as return of principal-something that traditional bond mutual funds and ETFs cannot. But the ability to diversify and have access to expertise from a credit and trading perspective is paramount when considering that route.

For these reasons, many financial advisors should consider using traditional bond mutual funds and ETFs as exposure vehicles while building a professionally managed bond portfolio to represent the core fixed-income allocation. In this way, an advisor can also customize the core bond portfolio to reflect the tax status, cash flow, liquidity and credit risk of the client, complementing the individual securities with ETF or mutual fund investments as necessary, with eyes wide open about the potential drawbacks.