What is a Bond ETF: Types, Benefits, & Risks + Tips on Choosing the Best One

Bond exchange-traded funds, also known as bond ETFs, are a great addition to any investor’s portfolio. Although not without drawbacks, these ETFs bring about some benefits and can be a great way to diversify your investments.

In this article, we cover what exactly bond ETFs are, the pros and cons of bond ETFs, what to look out for before buying a bond ETF, and more.

Table of Contents

What is a Bond ETF

Bond ETFs invest in a basket of bonds. They’re usually passively managed and are traded on the stock exchanges just like stocks.

Because the bond markets are generally less transparent and liquid than bond ETFs, many retail investors may prefer to get their bond exposure through these ETFs. Plus, bond ETFs are highly liquid, which promotes market stability during times of volatility and stress.

Types of Bond ETFs

Government Bond ETFs

Government bond ETFs track bonds issued by the government agencies of sovereign nations such as the U.S. They can be a great addition to your portfolio since these ETFs are rather stable and generally carry lower risk compared to other types of assets such as stocks. 

Examples of Government Bond ETFs include:

  • U.S. Treasury ETFs
  • Treasury Inflation-Protected Securities (TIPS) ETFs
  • International Bond ETFs

Corporate Bond ETFs

Corporate bond ETFs contain bonds issued by companies trying to raise capital through the bond markets. These ETFs typically offer higher yields and have a higher credit risk compared to government bond ETFs.

Examples of corporate bond ETFs include:

  • High yield (junk) bonds
  • Investment grade bonds

 Municipal Bonds ETFs

Municipal bond ETFs, also known as “munis”, invest in bonds issued by states, counties, cities, special purpose districts, or local government agencies. These bonds are typically issued to finance civic projects like the building of schools or repairing of roads.

Most municipal bonds ETFs are exempted from federal tax and tend to have a lower risk of default since the bonds are backed by the government.

International Bond ETFs

International bond ETFs consist of government and corporate bonds issued by foreign countries. These ETFs can cover a wide range of maturities, credit qualities, denominated currencies and bonds, increasing diversification by expanding your exposure to different economies and interest rate dynamics.

Singapore Bond ETFs

Looking to invest in bond ETFs in Singapore? Here are some ETFs listed on the Singapore Stock Exchange (SGX) for your reference: 

  • ABF Singapore Bond Index Fund (A35)

The ABF Singapore Bond Index Fund (SGX: A35) is a government bond ETF and the oldest bond ETF in Singapore.

It tracks the iBoxx ABF Singapore Bond Index and is made up of high-quality bonds issued by the Government of Singapore and government-linked entities like the Housing & Development Board (HDB) and Temasek.

The bonds in this ETF are rated AAA, Aaa, AAA (the highest possible rating) by the Standard & Poor’s, Moody’s, and Fitch, meaning that it is relatively safe and has the lowest risk of default.

  • Nikko AM Investment Grade Corporate Bond ETF (MBH)

The Nikko AM Investment Grade Corporate Bond ETF is Singapore’s first investment grade corporate bond ETF.

It contains investment-grade bonds issued by established companies like Singapore Airlines, United Overseas Bank, Housing & Development Board, and DBS Bank.

Benefits of Bond ETFs

Diversification

Bond ETFs can contain hundreds or thousands of bonds, providing diversification—an important benefit in highly volatile markets.​ This helps your portfolio become more resilient, stable, and less risky than if you own a handful of individual bonds. 

Investing Made Simplified

Building and monitoring a portfolio of multiple bonds and analysing individual bonds can be challenging and time consuming for retail investors. Bond ETFs remove the need for active monitoring and individual bond picking, allowing you a more hassle-free investing experience. 

Cost-Effective

Imagine this:

You’re buying 100 bonds, and a commission fee of $1.99 is paid to your broker for each purchase. That will cost you almost $200, and such fees can add up and take a toll on your returns.

Bond ETFs, on the other hand, are more cost-effective because they allow you to buy the 100 bonds at once and charge a one-time brokerage fee, significantly reducing your cost.

Risks of Bond ETFs

Interest Rate Risk

Interest rate risk is an inherent part of investing in bonds. The relationship between bond prices and interest rates are inversely related; bond prices go up when interest rates fall, and vice versa.

Investors of bond ETFs are affected by interest rate risks and may have to deal with capital losses in high interest rate environments.

Market Risk

Bond ETFs are influenced by general market movements. Fluctuations in the market caused by macroeconomic or geopolitical factors or changes in investor sentiment may affect the value of bond ETFs.

Default Risk

Default risk occurs when the bond issuer is unable to make principal or interest payments, resulting in potential losses to investors. Although bond ETFs allow investors to mitigate this risk through diversification, this risk is still something to consider before you make a purchase.

How to Choose a Great Bond ETF

Credit Rating

Credit ratings are important because they predict the likelihood that the bond issuer (companies, governments or other entities) will default on their debt obligation. Bonds in ETFs can be given a variety of ratings, ranging from AAA to D, and investors use these ratings to judge the riskiness of investing in a particular bond ETF.

Holdings of the Bond ETF

As an investor, it’s important that you know what you’re buying into. Consider looking into what are the actual holdings of the ETF and whether they’re aligned with what you’re looking for.

Expense Ratio

Expense ratio refers to the cost of owning an ETF. This includes costs associated with running the ETF, including management fees, advertising or marketing costs.

Buyers of bond ETFs need to beware and watch out for how much they’re paying for because these fees will compound overtime and can eat into your returns significantly.

How to Buy Bond ETFs in Singapore

Syfe Brokerage

Bond ETFs trade on the stock market just like regular stock, making it easy for investors like you and I to make a purchase. You can invest in bond ETFs as you would a stock through a brokerage platform like Brokerage.

Syfe’s Brokerage is a MAS-regulated brokerage platform designed to provide you with a hassle-free investing experience. 

Sign up today to enjoy free trades for US bond ETFs and low fees for SGX with no platform or hidden fees. 

Frequently Asked Questions About Bond ETFs

  • Do bond ETFs pay dividends?

Yes, bond ETFs pay dividends; the amount of dividends paid is based on the interest income earned on the bonds held by the ETF.

  • What’s the difference between a bond ETF and bond fund?

While bond mutual funds and bond ETFs are similar, there are some differences between them. One key example is the transparency offered by bond ETFs vs bond mutual funds. Bond ETFs declare their underlying assets daily, while bond mutual funds typically declare their assets at the end of every month.

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