One of the things I hate is people parroting the claim that you don’t gain anything by holding individual bonds rather than a bond fund. They make the claim with an arrogance that suggests they think it’s a deep insight others have missed.
If you hold the exact same individual bonds as you’d otherwise be holding in a bond fund, and if you trade bonds in a way that replicates a bond fund, holding individual bonds does nothing for you. That’s two extremely large if qualifiers that are left unstated. It’s almost never the case that a bond fund represents the optimal group of individual bonds that one should hold (though for other reasons I won’t go into here, bond funds are often the better choice).
Just one example: Suppose you are retiring and you have a mortgage with a lower interest rate than you can lock into a bond ladder. Paying off the mortgage wouldn’t make sense. Buying a bond ladder with individual bonds that mature at exactly the dates you need in exactly the amounts you need for the next nine years takes all risk off the table. Buying a bond fund like BND does not accomplish the same thing. Unless you somehow find a bond fund that exactly mimics the ladder you need, and you probably won’t, you’re better off going with the bond ladder.
Another thing that gets me worked up is the claim that bonds (individual or funds, but I’m thinking more about funds here) can drop in value quite a bit. True, but if you don’t sell them, who cares? If you’re going to hold them for another 10 years, the interest rate hike that made the value of your bonds drop puts you in a better financial position ten years down the road.
Finally, let’s distinguish between cash and bonds. If you have short-term liquidity needs, you should be holding cash, not intermediate or long-term bonds. The liquidity issues of intermediate-term bond funds are a result of trying to use them for something they’re not designed to do. This is related to the previous point. Changes in the value of your bond fund only matter if you’re using them to meet your short-term liquidity needs. And that’s not (or shouldn’t be) why you hold an intermediate-term bond fund.