What Is a Bond ETF?

Bond ETFs are bundles of investments that track particular bonds and bond markets, offering easy and affordable diversification options.
Apr 27, 2022

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Financial advice can feel conflicting. Someone may have told you bonds are a good way to balance your financial portfolio and weather stock market volatility. Some headlines might have warned you away from bonds during periods of inflation.

The truth is a bit more complicated. Bonds still offer consistent long-term returns and can be an important part of a diverse financial portfolio. Inflation also tends to impact certain bonds negatively, and we’re currently in an inflationary period. In March, inflation surged to 8.5% compared with a year ago, largely driven by increases in gas, food and shelter prices

.

A wide array of over 300 bond exchange-traded funds on the U.S. market, also known as bond ETFs, offer an easy and affordable way to diversify your financial portfolio, create a source of income and reduce volatility. Here’s what you need to know about bond ETFs and the advantages of different types of bond ETFs versus buying individual bonds.

Bonds, funds and ETFs, explained

If you need a quick refresher: A bond is a loan from an investor to a company or government. The borrower uses the loan to fund its operations, while investors earn interest on the loan, also known as the rate of return. As a result, bonds are known as fixed-income investments.

Funds are pools of cash used for a specific purpose, such as investing in assets like stocks or bonds. An ETF is a basket of investments with a particular focus or strategy, like bonds. ETFs are traded on an exchange throughout the day like stocks, but they offer the diversity of a mutual fund — often at a lower cost.

Bond ETFs exclusively track and trade bonds, bond indexes or other fixed-income investments in various categories. When you buy a bond ETF, you're purchasing a share of the fund and receiving a portion of that fund's returns.

» Learn more: What is an ETF?

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Advantages of bond ETFs versus individual bonds

ETFs are touted for a simple reason: easy and affordable diversification. Building out your portfolio by individually picking stocks or bonds can be risky and expensive. For instance, while a single U.S. Treasury bond sells for $100

, a single municipal bond can cost a minimum of $5,000.

The minimum investment for a bond ETF, in contrast, is the share price, which can be much more affordable. For instance, on April 25, 2022, a single share of the First Trust Municipal High Income ETF, or FMHI, was $49.33. In other words, for under $50, you could buy a share of FMHI and instantly be invested in a wide spectrum of U.S. municipal bonds. Bond ETFs can be purchased through most online brokers and may contain hundreds of bonds, instantly spreading your risk across many investments.

Here are some other essential characteristics of bond ETFs:

  • Liquidity: Bond ETFs are liquid, meaning they can be bought or sold at any time without negatively impacting the price. On the other hand, individual bonds vary in how easily they can be bought and sold. Long-term treasuries, for example, are attractive for their high yields. However, they can also be less liquid than a bond ETF if you were to try and sell in a pinch.

  • Maturity: Bond ETFs maintain constant maturity. In contrast, individual bonds mature on a specific date. Since a bond ETF is a "basket" of bonds that mature at various dates, the bond ETF calculates prices by using the average maturity at any given point in time.

  • Tradability: Bond ETFs are easily tradable through any brokerage account that offers them. Some individual bonds have more complex sale processes.

Bond ETF examples

Just as there are many kinds of ETFs, there are also many types of bond ETFs. For example, while one bond ETF might offer you access to highly rated municipal bonds, another might include U.S. Treasury inflation-protected securities, corporate bonds or international bonds. The following table contains examples of different bond ETFs and their investment focus.

Example bond ETFs

Investment focus

Invesco BulletShares 2023 Corporate Bond ETF (BSCN).

Tracks an index of U.S. investment-grade corporate bonds that mature in 2023.

PIMCO 15+ Year US TIPS Index ETF (LTPZ).

Tracks long-term treasury inflation-protected bonds, whose principle moves with inflation. The long date to maturity can mean higher potential yields.

iShares TIPS Bond ETF (TIP).

Broad exposure to inflation-protected treasury bonds.

Vanguard Short-Term Inflation-Protected Securities ETF (VTIP).

Tracks an index of short-term inflation-protected U.S. securities with a remaining maturity of less than five years.

JPMorgan International Bond Opportunities ETF (JPIB).

International bonds, primarily government and corporate.

Fidelity Total Bond ETF (FBND).

Actively managed total bond market fund that aims to produce a high income stream.

VanEck Long Muni ETF (MLN).

Tracks an index of long-term municipal bonds. Municipal bonds often offer investors tax-exempt income.

First Trust Municipal High Income ETF (FMHI).

Actively managed fund that primarily holds tax-exempt municipal bonds.

How to buy bond ETFs

Ready to get started? Try the following three steps:

  1. First, if you don’t already have a brokerage account, view NerdWallet's picks for the best brokers for ETFs to find the right one for you.

  2. Compare ETFs using free screening tools (often available through your brokerage account).

  3. Weigh characteristics such as expense ratios, volume, holdings, performance and trading prices.

  4. Once you’ve found an ETF, place a trade.

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