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Bond ETF

What it is

An ETF holding a spread of bonds that match a rule: government bonds of one country, corporate bonds of a certain quality, a maturity band, or the whole bond market. You get the income of hundreds of bonds and the diversification of not depending on any one issuer.

The trade-off against holding bonds directly is that a fund has no maturity. It keeps rolling into new bonds, so its price rises and falls with interest rates forever, and there is no date on which you are guaranteed your money back.

Used well, a bond fund is the steadying part of a portfolio. Used badly, a long-dated one is a bet on interest rates that surprised many people in 2022.

How it works

  1. The fund buys bonds that fit its rule and sells them as they fall out of it, keeping a steady profile.
  2. Interest from the bonds is paid to you or reinvested, minus a small ongoing charge.
  3. The price moves inversely to interest rates; the longer the average maturity, the bigger the swing.
  4. The fund's quoted yield to maturity is the best guide to what it will earn from here.

The honest pros and cons

For

  • Hundreds of issuers in one purchase, so no single default matters much.
  • Cheap, liquid and easy to add to monthly.
  • Short-dated government bond funds are close to cash with a little more yield.

Against

  • No maturity date, so no guaranteed return of capital.
  • Long-dated funds can fall 20 percent or more when rates rise.
  • High-yield bond funds behave like shares in a crisis.
  • Currency-hedged and unhedged versions behave very differently; buy the wrong one and you own a currency bet.

Getting it where you live

Wherever you are

  1. Decide the job: safety and income means short-dated government bonds; more yield means accepting more swing.
  2. Check the average maturity and the credit quality, then the ongoing charge.
  3. Prefer a version hedged to your own currency unless you want the currency exposure on purpose.

Go deeper

Also called

bond index fund, fixed income ETF, gilt fund, treasury ETF

Often confused with

  • Government bond: A loan to a government that pays interest and returns your money on a set date, called its maturity.
  • Stock index ETF: A fund traded on an exchange that copies a stock market index at low cost.