Bonds hub

What is a bond ETF

Q: How do I choose a bond ETF?

Start by comparing the funds that deal with the bond market you want to track. The best bond funds tend to be the largest as they are the cheapest to trade, while also passing on economies of scale to investors via lower costs. The biggest two providers in Britain are BlackRock’s iShares division and Vanguard.

Q: Are bond ETFs safer than bonds?

Owning a large basket of bonds can be safer than owning a single bond because there is less risk that a default will destabilise the portfolio. But while it may not fall as much as a single poorly performing bond, it will probably not rise as much as a strong performing one either.

Q: Do you get dividends from bond ETFs?

Bonds pay a coupon to investors, normally twice a year, in return for lending them money. In an ETF all the income generated from the portfolio of bonds is paid out to investors, normally on a quarterly or monthly basis. Some bond ETFs offer “accumulation” share classes, which reinvest the income.

Q: Are bond ETFs better than bond funds?

The main advantage of bond ETFs over bond index funds is that, because they are listed on the stock exchange, they can be instantly traded. Index funds, on the other hand, can only be purchased or sold once a day. However, bond ETFs are more expensive to trade due to the bid/offer spread.

A guide to bond ETFs or bond exchange traded funds.

A bond ETF or exchange traded fund is a portfolio of bond investments that is traded on a stock exchange such as the London Stock Exchange. This allows investors to buy and sell the ETF as if they were trading a stock.

ETFs add new bonds when they are issued and reinvest the cash they receive from maturing bonds, so bond ETFs can be bought and held ongoing.

Are bond ETFs the same as bond index funds?

In the vast majority of cases index funds and ETFs are passive strategies, aiming to closely match the return of an index.

The core difference is that unlike index funds, ETFs can be traded throughout the day on the stock market, much like individual shares. For long-term investors, the difference is not important.

Index funds are open-ended funds. They are collective investments that allow investors to pool their money together. These funds do not trade on the stock market, but instead price their investments daily.

Index funds own the same investments as stock exchange-listed bond ETFs and fulfil the same purpose for investors, for a similar annual fee.

Some bond ETFs differ in being actively managed, in which a fund manager picks which bonds they think will outperform the market. This ETF type is popular in the US, but are not widely available for UK investors.

Instead, investors who want active management should consider bond funds or investment trusts – which are structured like mutual funds.

Advantages of bond ETFs

Bond ETFs can offer access to thousands of different bonds through just one trade.
Simple and cost effective.
Good diversification, which lowers risk.
Can be traded instantly, allowing investors to make the most of current trading opportunities.
Lower maintenance than owning bonds directly.
They own bonds that are sometimes difficult to trade, so allow investors to own less liquid bonds.

Disadvantages of bond ETFs

In periods of market stress the value of the bonds in a portfolio may drop suddenly.
The net asset value (value of the ETF’s underlying investments) can diverge from the ETF’s share price, leading to discounts and premiums appearing. This means investors risk overpaying.
An actively managed bond fund – run by a professional investor – have the ability to outperform bond ETFs. There are, however, no guarantees.

How bond ETF pricing works

There’s an offer and bid price for an ETF. The offer (or ‘ask’) price is the market price to purchase the ETF, while the bid price is the market price at which the ETF can be sold. The difference between the two is known as the ‘spread’.

For large ETFs, there is not much difference between the offer and the bid price as they are heavily traded, but smaller ones may have a larger gap.

Index-linked bond ETFs only have one price.

How do interest rates affect bonds?

The outlook for bonds is heavily impacted by interest rates. Higher rates are bad for bond prices, while falling rates are good for bond prices. The longer the maturity date of a bond, the more it is influenced by rising and falling interest rates.

One of the most popular bond ETF strategies tracks the “global aggregate bond” universe, or simply global bonds from different governments and companies.
This basket of bonds will begin to yield more when interest rates rises but the value of the portfolio could fall. If rates fall then its yield will decline, but the value of the bonds may rise.

Bond ETF FAQs

How do I choose a bond ETF?

Are bond ETFs safer than bonds?

Do you get dividends from bond ETFs?

Are bond ETFs better than bond funds?

How to buy bonds

You can trade a number of bonds and gilts via your online ii account. For any that aren't available online, you can deal over the phone by calling us on 0345 607 6001.

Bonds & gilts table

Call us

The value of your investments may go down as well as up. You may not get back all the money that you invest. If you are unsure about the suitability of an investment product or service, you should seek advice from an authorised financial advisor.