What is Bond ETF?

Bond ETF is a type of exchange traded fund, which makes investments strictly and exclusively in Bonds. In a way it is like mutual fund with the only difference being the product of investment.

ETFs are like bond mutual funds as they hold a portfolio of bonds with different strategies, viz. U.S. Treasuries bonds and long-term and short-term bonds. Bond ETFs are passively managed and trade much like stock ETFs on a major exchange. This helps promote market stability and depth by adding liquidity and transparency during times of stress.

Although bond ETFs, just like the other ETFs, make a correlating index or underlying investment product, they are not as simple as the others. Bonds are usually fixed-income assets and are not very liquid. Hence, investors hold these bonds until maturity and do not usually trade them on secondary markets like stocks and indexes. Another important aspect about these bonds is that their pricing information is not traditionally transparent. This is where a bond ETF makes a difference. A Bond ETF work just like any stock ETF. They also track a correlating bond index or product.

Bond ETFs need to be liquid, and available to the secondary markets. Also, these cannot afford to have unclear pricing. These are a few areas that a bond ETF needs to overcome.

Features of Bond ETF

Bond ETF provides a pooled investment facility with easy trading on exchange as well as over the counter.
Bond ETF is a long term core investment activity unlike speculation activity of equity market.
It provide monthly fixed income based on the coupon rate and further they may provide annual dividend.
Being ETF these Bonds are traded globally, so there is a worldwide market for this instrument.
Diversification of investment provides a better caution in the time of adverse market situation.
There is a stipulated regulatory authority, which over watch the activities and methodologies used by the fund houses.
Bond ETFs are transparent about where the portfolio is invested and what the proportion of investment is in a particular segment or sector.
Bond ETFs do allow investors to invest with precision in the bond market. They can create their own model portfolios, so it lets investors be in the driver’s seat.
Usually an order to purchase or sell the ETF is executed at the price at the end of the day, so there is no need to keep a continuous watch throughout the day.
Most of the ETFs are indexed funds they are having lower expense ratio, hence resulting into lower cost of investing.
Bond ETF continuously keeps investing in different bonds, so everyday there is a maturity of some bond and entry of new bond. So, eventually there is no maturity date or period for Bond ETF.
Bond ETF is also traded in derivative market, providing leverage to an investor against potential loss.
Bond ETF provides fixed coupon rate, so in case of hike of interest rate in an open market; there may be some loss of income.
No Bond ETF give protection against the capital invested as it is an index traded fund and therefore the price may vary on daily basis.

Global Scenario of Bond ETF

Globally, Bond ETFs have survived many crises for 2008, European debt crisis, US Treasury downgrade to oil sell-off of 2014 etc. During all these times it was seen that very fewer bond were trading over the counter, while on the other hand Bond ETF was facing multifold increase in trading activity. In terms of crisis, bond ETFs trading volume increases manifold.

However, There is a long way to go. Bond ETF market penetration remains incredibly low relative to equities. The U.S. fixed-income market is roughly twice the size of the equity market today, commanding nearly $50 trillion, but bond ETFs represent only 0.9% of the entire…