What are Bond ETFs?

In the changing world of investment, there are various investment options available for different sets of investors. One of such investment options for a conservative investor is a Bond ETF, which is traded on the stock exchange.

In today’s blog post, we will give you an overview of the Bond ETF, along with its benefits and features.

What are Bond ETFs?

A bond ETF is a passive investment option that invests in a portfolio of bonds or fixed-income securities. The bond ETFs are traded on the stock exchange like any other stock; therefore, investors are required to have a demat and trading account to invest in bond ETFs. The bond ETFs are offered by various asset management companies. Download Pocketful and invest in Bond ETFs easily for a smooth, low-cost investing experience.

Key Features of Bond ETFs

The key features of bond ETFs are as follows:

1. Diversified Portfolio: By investing in a bond ETF, one can get exposure to different bonds, which helps in reducing issuer-specific risk.
2. Regular Income: Bond ETFs regularly pay the interest earned from bonds and distribute income periodically.
3. Economical: Bond ETFs are a low-cost investment option, as they have lower management fees.
4. Transparency: Bond ETFs offer transparency, as one can check the portfolio composition, as well as the price listed on the stock exchange.
5. Liquidity: As the units of bond ETFs are traded on the stock exchange, they are available for buy and sell during the market hours.

Read Also: What is Dividend ETF?

Types of Bond ETFs

The different types of bond ETFs are as follows:

1. Government Bond ETFs: The government bond ETFs are primarily invested in the bonds issued by the central and state governments.
2. Corporate Bonds ETFs: These bond ETFs invest money in the bonds issued by private companies.
3. PSU Bonds ETFs: They invest in the bonds issued by the public sector undertakings, which offer lower risk with higher yields.
4. Short-term bonds: When a bond ETF invests money in bonds having short-term maturity, they are known as short-term bonds. These bonds are less sensitive to interest rate changes in the economy.
5. Long-term bonds: The long-term bonds ETFs primarily invest money in bonds having a maturity ranging from 10 – 30 years.

How does the Bond ETF work

The Bond ETF works in the following manner:

1. Selection of Index: The index is selected in the first step. It can be a government bond, a corporate bond, or other types of bonds. 
2. Creation of Portfolio: The portfolio is created in the next step, where the fund is invested in bonds that are part of the selected index.
3. Listing of Units: Once the portfolio is created, the units are then listed on the stock exchange. And it can be bought and sold during the trading hours.
4. Income Distribution: Bonds pay periodic coupons, hence the interest earned on the bonds is distributed to the unit holders. 

Read Also: Best ETFs in India

Advantages of Investing in a Bond ETF

The key advantages of investing in a bond ETF are as follows:

1. Stable Returns: As the bond ETFs invest money in fixed income securities, therefore it offers stable returns than equity ETFs.
2. Portfolio Diversification: By investing in a bond ETF, one can easily diversify their bond portfolio across multiple bonds. 
3. Economical: Bond ETFs are low-cost investment options as they are passively managed and have a lower expense ratio.
4. Liquidity: The bond ETF offers high liquidity as it can be easily bought and sold during market hours.

Disadvantages of Investing in a Bond ETF

The disadvantages of investing in a Bond ETF are as follows:

1. Interest Rate Risk: The bond prices change based on the current interest rate in the economy. Therefore, any fall in the interest rate can significantly impact the bond ETFs.
2. Credit Risk: Investment in a bond comes with credit risk because the issuer of the bond can default or face credit downgrades.
3. No Maturity: The bond ETFs do not have any maturity date or period, like any other individual bond. Therefore, making less predictable returns.
4. Premium or Discount Price: As the bond ETFs are traded on the stock exchange, there is a risk of trading at a premium or discount to their actual NAV. 

Read Also: What is Gold ETF? Meaning & How to Invest Guide

Who should invest in Bond ETFs?

Investing in the bond ETFs is suitable for the following investors:

1. Conservative Investor: Investors who do not want to take risks and look for capital protection investment options can consider investing in bond ETFs.
2. Regular Income: Bond ETFs regularly pay interest received on the bonds to the investors. Hence, investors who are looking for regular income can invest in bond ETFs.
3. Diversification: Those who wish to diversify their bond portfolio can use bond ETFs as an investment option.
4. Short-Term Goals: Investors who wish to park their funds for short-term goals can invest in bond ETFs.

Conclusion

On a concluding note, bond ETFs are a suitable option for investors seeking steady gains in addition to regular income, particularly those who are unwilling to risk their capital. However, having a trading account and a demat account is essential because these are the primary methods available for purchasing ETFs. They are not completely risk-free; there are still some risks, such as interest rate changes and the chances of credit default. Therefore, it is advisable to consult your investment advisor before making any investment decision. To invest in a bond ETF, you can now open your demat and trading account with Pocketful, as it offers a lifetime free demat account with zero brokerage on delivery.

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