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What is a bond ETF?

Bond ETFs are a type of exchange-traded fund (ETF) that invest in various fixed income securities, such as corporate or treasury bonds. They are similar to bond mutual funds because they tend to hold a portfolio of fixed income securities based on a specific strategy, including bond types, bond issuers, bond maturities, etc. 

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Who are bond ETFs for?

Many individual investors turn to bond ETFs because they provide an opportunity to build a diversified portfolio of bonds at a lower cost. Typically, the performance of a bond ETF tracks interest rate trends, rising when interest rates fall and dropping when interest rates rise.

Bond ETFs are an easy and relatively inexpensive way to gain exposure to the bond market, to add diversification to your portfolio. Like an individual bond in your portfolio, the bonds held in an ETF often make coupon payments, so investors might benefit from the chance to receive regular income payments. If income is your goal, a bond ETF – which holds a number of bond assets with different maturity dates – usually provides income payments monthly, more often than if you just held an individual bond.

What kinds of bond ETFs are there?

There are a variety of bond ETFs available in Canada, which can provide diversified exposure to various types of government and corporate bonds. For example, you can buy a bond ETF that covers the broader bond market, one that invests in either government or corporate bonds, or bond ETFs based on different time horizons. The oldest bond ETF in Canada was launched in November 2000, but many other issuers also offer similar broad-based bond ETFs.

Investors can also choose short-, medium- or long-term bond ETFs, or choose a bond laddering approach with ETFs, where each security matures at a different date. This helps to minimize interest-rate risk and increase liquidity. Investors can buy individual bond ETFs and create their own laddering strategy, or purchase bond ladder ETFs with varying maturities, which reinvest maturing bonds for you. Another option for investors is real return bond ETFs, which aim to protect against rising inflation. They have long maturities but pay extra interest if inflation rises.

What should I look for in a bond ETF?

When it comes to selecting bond ETFs, most investors choose diversified products with different types of bonds that mature at various times. However, investors seeking higher yield may favour corporate bonds, while investors expecting inflation to rise might turn to real return bond ETFs. Investors should also consider the amount of fixed-income products they want in their portfolio overall, as well as their appetite for risk.

You can find Canadian and U.S. fixed income ETFs in the Qtrade ETF Centre. Log in to your Qtrade account, select Quotes & Market Info > ETFs. Click on the ETF Screener tab and select the Fixed Income tile to obtain a list. Or check out the variety of bond ETFs available to buy and sell commission free.

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The information contained in this article was obtained from sources believed to be reliable; however, we cannot guarantee that it is accurate or complete. This material is for informational and educational purposes and it is not intended to provide specific advice including, without limitation, investment, financial, tax or similar matters.