1. Exchange-Traded Funds: Introduction
  2. Exchange-Traded Funds: Background
  3. Exchange-Traded Funds: Features
  4. Exchange-Traded Funds: Biggest ETFs and ETF Providers
  5. Exchange-Traded Funds: Active Vs. Passive Investing
  6. Exchange-Traded Funds: Index Funds Vs. ETFs
  7. Exchange-Traded Funds: Equity ETFs
  8. Exchange-Traded Funds: Fixed-Income and Asset-Allocation ETFs
  9. Exchange-Traded Funds: ETF Alternative Investments
  10. Exchange-Traded Funds: ETF Investment Strategies
  11. Exchange-Traded Funds: Best Practices for Trading ETFs
  12. Exchange-Traded Funds: Conclusion

Fixed income ETFs have revolutionized investing in this challenging asset class for retail investors by bringing transparency, diversification and liquidity to fixed income investing.  While it is a difficult and expensive process to build a diversified fixed income portfolio, fixed income ETFs enable investors to gain access to broad bond portfolios or target specific attributes with regard to credit quality, maturity and duration of these bonds. Investors also get the benefits of institutional pricing within fixed income ETFs and better liquidity because they are traded on an exchange. (Related: Bond ETFs: A Viable Alternative)

Unlike an equity ETF that generally holds all the stocks in its target index, a bond ETF may only hold a fraction of the bonds that make up the underlying fixed income index. Because of the difficulty in buying illiquid bonds or bonds that have limited supply, the managers of a bond ETF use a sampling technique that allows them to closely track the performance of the underlying bond index.

Bond ETFs pay out interest through a monthly distribution, while any capital gains are paid out annually.

Investors can choose from a variety of bond ETFs that are available to meet investors’ objectives and risk tolerance, including the following:

Broad-based Bond ETFs

Investors can buy a broad-based bond ETF that contains a broad mix of government and corporate bonds at various maturities. An example of such an ETF is the iShares Core U.S. Aggregate Bond ETF (AGG). (Related: Investing in Government Bond ETFs)

All-Term Bond ETFs

These ETFs invest in fixed income securities of varying durations, including short-term, mid-term, and long-term. The iShares U.S. Treasury Bond ETF (GOVT) is an example of such an EF.

Short-term Bond ETFs

These ETFs invest in fixed income securities with duration between one and five years. For example, the Vanguard Short-term Bond ETF (BSV)., or the iShares 1-3 Year Credit Bond ETF (CSJ).

High Yield Bonds

Also known as junk bonds, high yield bonds are non-investment grade bonds that carry a rating of BBB or lower. Popular high yield bond ETFs include the iShares iBoxx $High Yield Corporate Bond ETF (HYG) and the SPDR Barclays High Yield Bond ETF (JNK).

International Bond ETFs

International Bond ETFs give investors exposure to the overall bond market overseas. For example, the Vanguard Total International Bond ETF (BNDX) tracks the performance of a Bloomberg Barclays international bond index and employs hedging to protect against exchange rate uncertainty.

Treasury Inflation-Protected Securities Bond ETFs

TIPS bonds pay interest equal to the Consumer Price Index plus a premium. They provide a hedge against inflation and are designed to outperform regular bonds when inflation expectations rise. An example of a TIPS ETF is the iShares TPS Bond ETF (TIP), which offers broad-based exposure to TIPS.

Target Maturity Bond ETFs

Like traditional bonds, target maturity bond ETFs make regular income payments and have a fixed maturity date. As the target maturity date approaches, the average time to maturity of the ETF’s portfolio will decrease to match this maturity. An example of a target bond maturity ETF is the Guggenheim BulletShares 2020 Corporate Bond ETF (BSCK), which focuses on  investment grade corporate debt that is scheduled to mature in 2020.




Exchange-Traded Funds: ETF Alternative Investments
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