Ingredients

Bond ETFs are passively managed Exchange-Traded Funds (ETFs) that consist solely of fixed-income securities. The types of bonds comprising a given bond ETF can include those of different strategies such as U.S. Treasuries, high-yield bonds, corporate bonds, convertible bonds, floating-rate bonds. Also, bonds within a given bond ETF can include those of different holding periods such as long-term and short-term.

Trading

Bond ETFs are traded on major stock exchanges. Investors gain passive exposure to benchmark bond indices at low-cost.

Laddering

By obtaining multiple fixed-income securities each of which have a different maturity date – intentionally spread across several months/years – the proceeds can be reinvested regularly as each bond matures. By making multiple smaller bond purchases with varying dates, interest-rate risk can be hedged against, liquidity can be staged, and credit risk can be diversified.

Bond selection

High inflation and rising interest rates depress the value of long-term bonds. Conversely, then, as interest rates rise, bond ETFs experience higher yields.

Bonds within the broader portfolio

Bonds provide an anchor-point of fixed income within a well-diversified investment portfolio.

Awareness

Bonds investors should stay aware of the effect of interest rate changes.

Notes

• Bond mutual funds include active management.
• Bonds ETFs are recommended for investors looking to buy/sell frequently.