Bond Exchange Traded Funds (ETFs): What Are They and Why Trade Them

ETFs are a type of pooled investment fund that holds a basket of underlying assets. ETFs can be a way for traders to diversify their portfolios by exposing them to a wide range of stocks, bonds, and other securities.

Typically, ETFs track a particular sector, commodity, or index and are traded on the stock exchange market like a regular stock. In this article, we will look deeper into bond ETFs and why traders should trade them.

What are Bond ETFs and How Do They Work?

A bond is essentially a loan that the borrower issues to raise capital from investors who are willing to lend for a certain period of time [1]. For an investor, when they purchase a bond, they will receive payouts in the form of yields and ultimately need to wait until the bond matures to get back their principal. For example, a $10,000 bond with a 10-year maturity and a 5% coupon would pay $500 a year for 10 years, after which the original $10,000 face value is repaid to the investor ^[2].

Corporations looking to grow their businesses can consider issuing bonds, as they may need far more capital than a bank can provide. Bonds provide a solution by allowing many individual investors to act as lenders.

A bond ETF, as its name suggests, is an ETF that invests specifically in bonds only. Bond ETFs are traded on the stock exchange, and traders can apply their trading strategies just as they would for a stock. Typically, the bond ETFs are passively managed by a fund manager. However, some actively managed bond ETFs also aim to beat a benchmark index.

Instead of being sold over the counter by bond brokers like individual bonds, bond ETFs trade continuously throughout the day on a centralised market. Only the biggest and most liquid bonds from the underlying bond index are often included in bond ETFs. This allows the bond ETF to mimic the index while remaining more trader-friendly ^[3].

Examples of such bonds include the Vanguard Total Bond Market ETF (BND), which tracks the performance of a broad, market-weighted bond index, and the Vanguard Total International Bond ETF (BNDX), which tracks the performance of the Bloomberg Global Aggregate ex-USD Float Adjusted RIC Capped Index [4,5].

Difference between Bond ETFs and Bonds 

	Bond ETFs	Bonds
Maturity	As bond ETFs hold many different bonds in the same portfolio, some bonds pay their coupons at different times. This results in bond ETFs having monthly interest payments to investors.	Depends on the specific bond coupon payments. Interest payments are usually made every six months [6].
Payments	Some bond issues trade daily, while others are traded as little as once a month. Trading varies depending on the bonds. These bonds are usually traded over the counter market.	Maintain a constant maturity as some bonds in the ETFs may expire, and new bonds will be added and sold to keep the maturity at a constant average.
Tradability	Some bond issues trade daily, while others trade as infrequently as once a month. Trading varies depending on the bonds. These bonds are usually traded over the counter market.	Bond ETFs are traded on a market exchange; thus, they can be bought and sold at any time during market hours. The ETFs can be traded through brokerages.

Difference between Bond ETFs and Bond Mutual Funds

Bond ETFs and bond mutual funds are similar in terms of how they are represented. A fund manager manages funds collected from investors to buy a pool of stocks, individual securities, and, in this case, bonds. Here are some differences that separate the bond ETFs and bond mutual funds:

	Bond ETFs	Bond Mutual Funds
Expense ratio	Lower due to less management. The ETFs tend to track indexes, so trading activity can be less active.	Higher because actively managed. Actively managed, which will incur extra costs from the fund manager for doing research, analysis and trading.
Trading hours	The initial amount varies as set by the company or fund manager.	Can only be traded at the end of the trading day.
Minimum investment amount	Cost of one share of the ETF. For example, the BND ETF costs only $73.11 as of 19 September 2022, and traders only have to pay that amount to get one share.	Higher because actively managed. Actively managed, which will incur extra costs from the fund manager for doing research, analysis, and trading.

Types of Bonds ETFs 

There are various bond ETFs in the market, which are mainly divided into four categories: sovereign, corporate, municipals, and broad market.

• Sovereign bond ETFs track the debt issued by the governments of sovereign nations.
• Corporate bond ETFs hold bonds issued by companies to raise capital and finance operations. 
• Municipal bond ETFs are a type of sovereign debt issued by a state, country, city, or even a town in the US to finance municipal projects such as highways and schools.
• Broad-market bond ETFs combine sovereign, corporate, and municipal debt into a single ETF.

The broad-market bond ETFs often serve as core fixed-income exposure and are the most commonly purchased by retail investors.

Related Article: 10 Types of Bonds You Need to Know in 2026

Why trade Bond ETFs? 

Pros	Cons
Interest rates: When interest rates change, bond prices may fall [8]. With individual bonds, traders reduce risk by holding them until they mature. Bond ETFs don’t mature, so there is little a trader can do to avoid this.	No maturity dates: Bond ETFs do not mature, as they consist of a range of bonds with varying maturity dates. This also makes it easier for traders to manage their portfolio.
Monthly payments: Some bond ETFs such as the Global X SuperDividend ETF (SDIV) pay dividends monthly [7].	Expense ratio: Bond ETFs are generally preferred over stock ETFs due to their lower volatility; however, their potential returns can also be limited. The potential returns will also be used to cover management fees, which might further reduce total returns.
Liquidity: Bonds and ETFs trade like stocks on the stock exchange, which can be bought and sold anytime throughout the trading day.	Liquidity: Bonds and ETFs trade like stocks on the stock exchange, allowing them to be bought and sold at any time throughout the trading day.
Diversification: Owning a bond ETF allows traders to diversify their portfolio with exposure to more than just a single bond.

How to trade Bond ETFs

#1 Open a brokerage account

Find the brokerage account that would suit you to begin trading with CFDs. Compare the brokerage features and platforms. Different brokerage accounts offer varying minimum deposits, per-trade transaction fees, and inactivity fees. Once you have decided on a brokerage, it is time to open an account to get you started on your trading.

#2 Choose the Bond ETFs CFDs

Once the account is up and running, begin researching and comparing the bond ETFs that you are interested in trading. Given the many bond ETFs, traders can use a set of criteria in their search, such as credit risk, interest rate risk, the underlying index, and the bond ETF’s expense ratio [9]. 

#3 Fund the account and begin trading

Once you have selected the bond ETFs that you want to trade, fund the account, and begin trading the CFDs on ETFs available on the market.

Conclusion

Bond ETFs can offer significant value to traders and help diversify their portfolios. In addition, bond ETFs can be traded at any time during the trading day, and traders can use various strategies, such as day trading, swing trading, and short selling.

Vantage has just launched ETFs for traders to trade using CFDs. Open an account with Vantage and start trading bond ETFs today.

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