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Bond ETFs in focus

If you want the benefits of bonds, bond ETFs may be worth a look.

If you are looking for income, diversification, and exposure to a specific asset class, bonds can play an important role in your investment portfolio. When looking at the bond universe, bond mutual funds, bond exchange-traded funds (ETFs), and a diversified portfolio of individual bonds offer ways to obtain the benefits of fixed income.

Here are a few key things to know about bond ETFs—and some ETFs to consider.

The big bond world

When it comes to the bond market, you have a lot of choices. It can be a daunting task to assemble and maintain an appropriately diversified portfolio of individual bonds, given the size and diversity of the well over $100 trillion bond universe.1

Buying bonds in the past was more complicated, as the bond market used to be more opaque and fragmented. Today, with visibility into recent trades, depth of available inventory, and access to most of the available secondary market offerings, you are able to get a better snapshot of a bond’s value and its liquidity than ever before.

In addition, bond mutual funds and bond ETFs are often a low-cost way to buy a diversified basket of bonds, even if you have a relatively small amount of money to invest. For a detailed comparison of the features of bonds, bond mutual funds, and bond ETFs, see the table.

Bond funds vs. bond ETFs vs. bonds

  Income potential Growth potential Principal preservation Fees or expense ratios Investment and diversification
Bond mutual funds Regular fund distributions, though amounts vary depending on the underlying bond holdings of the fund. Potential for capital appreciation and loss. Most bond funds do not have a maturity date, so principal will fluctuate. Most funds can be bought and sold daily. Mutual funds charge a fee represented by the expense ratio, which reflects operating expenses as a percentage of the fund’s average net asset, as well as any transaction or load fees. Most funds have a $2,500 to $10,000 minimum investment. Bond funds are portfolios of bonds, which can offer broad diversification, depending on the fund’s investment objective.
Bond ETFs Regular fund distributions, though amounts vary depending on the underlying holdings of the fund. Potential for capital appreciation and loss. ETFs can be bought and sold intraday on an exchange. Most ETFs do not have a maturity date, so principal will fluctuate. Net expense ratios tend to be lower than bond mutual funds but can be comparable to some, and trading fees depend on product and platform. ETFs may trade at a premium or discount to net asset value (NAV), and are subject to a bid/ask spread. No minimum investment required. Bond ETFs are portfolios of bonds, which can offer broad diversification, depending on the fund’s investment objective. Some are narrowly focused.
Individual bonds Fixed-rate bonds offer periodic payments of fixed amounts. Other types of bonds may vary payments. None if bought at par value and held to maturity without default. Bonds can be purchased and sold in the secondary market prior to maturity at a profit or loss. Principal or par value of the bond returned at maturity, subject to the creditworthiness of the issuer. Secondary market sale can result in a profit or loss and day-to-day values will fluctuate. Brokerage fees may apply. No fee or charge for new-issue bonds, Treasuries, CDs, and munis. If not held to maturity, transaction cost (bid/ask) will be impacted by position size. There are costs for transacting in the secondary market. The minimum is generally $1,000 to $5,000, depending on the type of bond. To be diversified, you will need to buy a basket of bonds.

Bond funds up close

While bond mutual funds have been around longer, bond ETFs are growing in popularity. Since the first US-listed bond ETF was launched in 2002, bond ETFs have accumulated over $1.5 trillion in assets.2

Bond ETFs are similar to bond mutual funds in that both hold a basket of individual bonds and can be passively managed (the fund attempts to mirror the performance of a bond index or benchmark) or actively managed (the fund attempts to outperform a bond index or benchmark). To date, most bond ETFs are passively managed.

Both bond mutual funds and bond ETFs can provide exposure to a variety of markets, sectors, maturities, and credit qualities.

Their tax treatment is similar too, although ETFs can have a tax advantage when it comes to capital gains as they are able to minimize capital gains distributions through the creation and redemption mechanism. When it comes to individual bonds, you generally pay income taxes on interest received at ordinary income rates, unless the bond is tax-exempt, but you don’t pay capital gains taxes unless you sell the bond before maturity at a profit. With a bond ETF or fund, you will likely pay both income taxes on interest paid when you sell units of a fund, typically through a monthly dividend (e.g., a fund distribution), and capital gains if they are paid out, typically through an annual dividend (e.g., a fund distribution).

However, there are some differences. Whereas a bond mutual fund’s price is set at the end-of-day market price, a bond ETF is bought or sold at the intraday market price, which may be different than the ETF's net asset value (NAV).3

Bond mutual funds generally provide holdings disclosures monthly and discourage short-term trading of fund shares. In comparison, the vast majority of bond ETFs are required to disclose their holdings daily to support daily exchange trading activity. Depending on distribution models and to control short-term trading, bond mutual funds may be subject to redemption or transaction fees; bond ETFs are not. Instead, bond ETFs are subject to bid-ask spreads and brokerage commissions or fees.

“Bond ETFs might be most appropriate for those fixed income investors who like the advantages of ETFs, including intraday trading and holdings transparency,” explains Montanna Saltsman, ETF strategist with Fidelity. “Bond ETFs let you tactically pick and choose when you want to enter and exit the market, based on prevailing market conditions.”

Bond ETF risks

Of course, just as bond ETFs provide certain advantages, they also have risks. Bond ETFs have risks similar to individual bonds and bond mutual funds, such as maturity, interest rate, and credit risk. Bond ETFs also have tracking risk (a measure of risk that is due to active management decisions made by the portfolio manager), and their potential valuation may be at a premium or discount to NAV. It is worth nothing that passively managed bond funds can also exhibit tracking risk.

Additionally, some bond ETFs may not have a long enough track record to analyze how they might react to different market conditions and phases of the business cycle.

Abundance of bond ETF opportunities

You should decide for yourself whether bond ETFs, bond mutual funds, or individual bonds are right for you. Or a combination of these different types of products might be suitable, depending on your specific investing objectives, risk constraints, and time horizon. Whatever route you choose, a strong case for active bond management can be made in today's market, given the size and complexity of the bond universe.

If you are interested in exploring bond ETFs, check out the list of the largest bond ETFs by assets within 6 bond fund categories. Additionally, Fidelity offers 12 other bond ETFs: Fidelity Total Bond ETF (), Fidelity Corporate Bond ETF (), Fidelity Limited Term Bond ETF (), Fidelity High Yield Factor ETF (), Fidelity Low Duration Bond Factor ETF (), Fidelity Investment Grade Bond ETF (), Fidelity Investment Grade Securitized ETF (), Fidelity Preferred Securities & Income ETF (), Fidelity Sustainable High Yield ETF (), Fidelity Sustainable Core Plus Bond ETF (), Fidelity Tactical Bond ETF (), and Fidelity Sustainable Low Duration Bond ETF ().

iShares Short-Term National Muni Bond ETF (SUB)

Largest bond ETFs by net assets among a variety of categories
Broad market bond ETFs iShares Core US Aggregate Bond ETF () Vanguard Total Bond Market ETF () Vanguard Total International Bond ETF ( )
US government bond ETFs iShares 20+ Year Treasury Bond ETF  ( ) iShares 1-3 Year Treasury Bond ETF () Bloomberg 1-3 Month T-Bill ETF ( )
High yield bond ETFs iShares iBoxx $ High Yield Corporate Bond ETF () SPDR Bloomberg High Yield Bond ETF () iShares Broad USD High Yield Corporate Bond ETF ()
US corporate bond ETFs iShares iBoxx $ Investment Grade Corporate Bond ETF () Vanguard Intermediate-Term Corporate Bond ETF () Vanguard Short-Term Corporate Bond ETF ( )
US municipal bond ETFs iShares National Muni Bond ETF () Vanguard Tax-Exempt Index ETF ( ) Vanguard Short-Term Inflation-Protected Securities ETF ()
US inflation-projected bond ETFs iShares Tips Bond ETF () Schwab US TIPS ETF ()  iShares Short-Term National Muni Bond ETF (SUB)
Source: Fidelity Investments, as of January 31, 2024.

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ETFs are subject to market fluctuation and the risks of their underlying investments. ETFs are subject to management fees and other expenses. Unlike mutual funds, ETF shares are bought and sold at market price, which may be higher or lower than their NAV, and are not individually redeemed from the fund. 1. Source: Bank of International Settlements, as of January 31, 2024. 2. Source: Fidelity Investments, as of January 31, 2024. 3. NAV equals a fund's assets less its liabilities, divided by the total shares outstanding.

In general, fixed income ETPs carry risks similar to those of bonds, including interest rate risk (as interest rates rise, bond prices usually fall, and vice versa), issuer or counterparty default risk, issuer credit risk, inflation risk, and call risk. Unlike individual bonds, many fixed income ETPs do not have a maturity date, so holding a fixed income security until maturity to try to avoid losses associated with bond price volatility is not possible with these types of ETPs. Certain fixed income ETPs may invest in lower-quality debt securities, which involve greater risk of default or price changes due to potential changes in the credit quality of the issuer.

 For iShares ETFs, Fidelity receives compensation from the ETF sponsor and/or its affiliates in connection with an exclusive, long-term marketing program that includes promotion of iShares ETFs and inclusion of iShares funds in certain FBS platforms and investment programs. Additional information about the sources, amounts, and terms of compensation is described in the ETF’s prospectus and related documents. Fidelity may add or waive commissions on ETFs without prior notice. BlackRock and iShares are registered trademarks of BlackRock, Inc. and its affiliates. Fidelity Brokerage Services receives compensation from the fund's advisor or its affiliates in connection with a marketing program that includes the promotion of this security and other ETFs to customers ("Marketing Program"). The Marketing Program creates incentives for Fidelity Brokerage Services to encourage the purchase of certain ETFs. Additional information about the sources, amounts, and terms of compensation is in the ETFs prospectus and related documents. Please note that this security will not be marginable for 30 days from the settlement date, at which time it will automatically become eligible for margin collateral.

Any screenshots, charts, or company trading symbols mentioned are provided for illustrative purposes only and should not be considered an offer to sell, a solicitation of an offer to buy, or a recommendation for the security.

The views expressed are as of the date indicated and may change based on market or other conditions. Unless otherwise noted, the opinions provided are those of the speaker or author, as applicable, and not necessarily those of Fidelity Investments. The third-party contributors are not employed by Fidelity but are compensated for their services.

Past performance is no guarantee of future results.

Diversification and asset allocation do not ensure a profit or guarantee against loss.

 In addition, nondiversified funds that focus on a relatively small number of issuers tend to be more volatile than diversified funds and the market as a whole Before investing, consider the exchange-traded funds' investment objectives, risks, charges, and expenses. Contact Fidelity for a prospectus or, if available, a summary prospectus containing this information. Read it carefully.

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