You may have heard of exchange-traded funds, ETF for short, which are investment vehicles that track an index. But did you know there are bond ETFs?
ETFs work much like index mutual funds in that they hold assets in quantities mimicking an index. But, unlike mutual funds, ETFs trade on an exchange, like a stock.
Bond ETFs are simply ETFs that track a bond index instead of a stock index. Some track broad bond indices, such as the Lehman US Aggregate Index. Others track narrower bond indices, such as the Lehman 1-3 Year Bond Index and the Lehman 7-10 Year Bond Index. This allows investors to obtain exposure to bonds of specific maturities.
Bond ETFs are attractive because they offer easy diversification as well as low costs and tax efficiency. Because they aren’t actively managed, ETFs typically don’t have high fees. They also tend to have low turnover, to they generate relatively low capital gains.
