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Bonds · 07 / 09
ImplementationLevel 2Intermediate7 minUpdated

Individual bond, fund or ETF?

The same bond exposure can be built in three ways. The key difference is whether the investment has a fixed maturity date or not.

What you'll learn
  • When an individual bond makes sense
  • Why a bond ETF has no maturity date, and what that means
  • Which one suits your situation

A fixed maturity date or an ongoing portfolio

Buying an individual bond takes capital and a choice, but it gives you a fixed maturity date and a predictable cash flow. You know the day your capital comes back.

A bond ETF gives you the same exposure, diversified and liquid: one purchase, hundreds of bonds, tradable on the exchange. In return, it has no fixed maturity date. The fund keeps renewing its holdings, and its value moves with the market all the time.

Individual bond
A fixed maturity date, a predictable cash flow.
If you hold to maturity, interest rate moves along the way don't affect the outcome. Takes capital and carries a single issuer's risk.
Bond ETF
Diversification and liquidity, no maturity date.
Hundreds of bonds in one purchase, tradable on the exchange. The value moves all the time: when interest rates rise it can fall, even if you don't sell anything.

The most common misconception

Many people buy a bond ETF assuming it behaves like an individual bond: that if you hold it long enough, you get your capital back. That is not the case.

For most people, a diversified bond ETF is still the more practical route: minimum investments in individual bonds are often large, and diversification would be thin.

Chart
Three ways to add bonds to a portfolio
A bond ETF sits between cash and individual bonds.

Cash

Account or deposit
  • High liquidity
  • Simplicity
  • No volatility
  • Low return
  • No real return after inflation
Return potentialLow

Bond ETF

Exchange-traded fund
  • Diversified in one purchase
  • Daily exchange trading
  • Low minimum investment
  • Transparent price
  • Interest rate risk exists
  • Value can fluctuate
Return potentialDepends on the category

Individual bonds

Direct ownership
  • Exact coupon and maturity
  • Tailored exposure
  • High minimum investment
  • Diversification takes a lot of capital
  • More complex
Return potentialDepends on the bond

The description is illustrative. An investor's risk and return profile always depends on the features of the individual product.

The three options compared

Individual bond
The minimum investment is often large. A single issuer's risk, concentrated.
Fund or ETF
Hundreds of bonds for the price of one unit. Diversification is built in.

This content is for information purposes only and should not be construed as investment advice or a recommendation. Investing always involves the risk of losing capital. The value of financial instruments and investments can go up or down, and past performance is no guarantee of future returns.

Check your understanding
Test yourself: ways to invest
Three questions. Pick an answer to see the explanation right away.
Kysymys 1 / 3
Does an ordinary bond ETF have a maturity date?
Kysymys 2 / 3
What is the key advantage of an individual bond?
Kysymys 3 / 3
Why does a bond ETF suit most people better?
Score: 0 / 3

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