![]() It’s a more rigid process than investing in a bond ETF and usually comes with higher trading fees. If you wanted to purchase an individual bond, you would have to purchase through a bond broker. Individual bonds are not traded in the same way. In other words, a bond ETF has high “liquidity.” The price of the bond ETF will change throughout the day as investors buy and sell shares. If you do decide to sell your shares, you may receive more or less than what you paid for them depending upon the market conditions (that’s why they’re optimal for active traders-you can potentially buy at a low price and sell at a higher price).īond ETFs are ideal for investors because they’re traded on a centralized exchange throughout the day. You won’t get back your principal unless you sell your shares. The bonds within the ETF will mature, but the proceeds are simply reinvested in new bonds. Unlike individual bonds, bond ETFs have no maturity date. Just like if you were a shareholder in a corporation, you’ll receive monthly dividends, interest payments, and capital gains (if any of the bonds in the fund are sold for a profit). When you purchase shares of a bond ETF you’ll essentially become a shareholder. The fund provider owns the bonds, but investors can buy shares of the ETF on the stock market. A fund provider (often a brokerage firm) purchases all of the bonds that will be included in the bond ETF. If there’s no financial manager, then how are fixed income ETFs created?īond ETFs are created in the same way that other types of ETFs are created. That means that the costs associated with bond EFTs are very low, much lower than mutual funds (which are actively managed). ![]() “Fixed income” refers to any security that gives investors a fixed amount of interest or dividends until maturity is reached-namely, bonds.īond ETFs are passively managed, which means that there’s no financial manager who’s picking which bonds will be brought into the fund. So why’s it called a “fixed income ETF” anyway? Maturity: Some bond ETFs contain only short-term bonds, while others include only long-term bonds. International bonds: These bond ETFs will contain bonds that are issued by foreign governments. Treasury bonds are often considered the most lucrative type of government bond.Ĭorporate bonds: Some bond ETFs will only contain corporate bonds that have been issued by large companies. Government bonds: These bond ETFs contain bonds that are issued by either the federal government or by local governments (municipal bonds). Here are some of the most common areas of focus: Most bond ETFs will include a specific subset of bonds. A bond ETF may hold hundreds or even thousands of different bonds. While a regular ETF holds a collection of stocks or commodities, a bond ETF only holds a collection of bonds. A fixed income ETF (also known as a “bond ETF”) is an exchange traded fund that only invests in bonds.
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