EN
ETF schoolLevel 2Intermediate7 minUpdated Bond ETFs
A bond ETF owns bonds. Its return comes from interest and price changes, and its risk level depends on two things: how long the bonds are and how creditworthy the issuers are.
What does a bond ETF own?
A bond ETF owns bonds: debt securities through which governments, municipalities, development banks and companies borrow money. The bond's issuer pays interest and repays the principal on the maturity date.
Buying individual bonds is often difficult for a retail investor: minimum investments can be large and diversification stays thin. A bond ETF solves this. One unit gives you exposure to dozens or hundreds of bonds, and you can buy and sell it on the exchange every day.
Bond ETFs can differ from one another
- By the maturity of the bonds: from a few months to thirty years.
- By credit rating: investment grade or higher-yielding high yield.
- By issuer: a government, a development bank or a company.
- By currency: euro, dollar or a currency-hedged share class.
- By interest rate risk, i.e. duration.
How does the return come about?
A bond ETF's return comes from two parts: the interest income from the bonds the fund owns, and the change in the bonds' value. The interest income is relatively predictable; the change in value is not.
The key driver is duration: it describes how sensitively the fund's value reacts to changes in interest rates. When market rates rise, the value of existing bonds usually falls, and the longer the duration, the more sharply it falls.
Yield tiers show the risk level
It's practical to group bond ETFs into yield tiers that describe both return potential and risk. At the lowest end are cash and the money market; at the highest are corporate bonds, which can also include high yield bonds.
Cash
Daily · lowest risk
Money market
0–6 mo
Short government bonds
1–3 yrs
Short corporate bonds
0–5 yrs
Medium-term government bonds
3–10 yrs
Long government bonds
15–30 yrs
Medium-term corporate bonds
3–7 yrs · incl. high yield
The percentages are indicative annual yields (APY) based on the Kvarn X bond selection. They are not a promise of returns, and the figures change with market conditions.
The calculator is indicative only. The return estimate is based on the indicative annual yield and doesn't take costs, taxes or changes in value into account. Historical returns don't guarantee future performance: the value can go up or down.
Role in a portfolio
A bond ETF typically has three roles in a portfolio: it balances out equity risk, adds a more predictable return component and offers an alternative for idle cash. Whether it suits you depends on your goals, time horizon and risk tolerance.
Frequently asked questions about bond ETFs
What is a bond ETF?
A bond ETF is an exchange-traded fund that invests in fixed income instruments, such as government bonds, corporate bonds or short-term money market investments. Its units are traded on an exchange in the same way as shares.
How does a bond ETF's return come about?
The return comes from two parts: the interest income from the bonds the fund owns, and the change in the fund's value. The ETF's value can go up or down, for example as a result of changes in market interest rates.
Why invest in bonds through an ETF?
With one trade you get diversified bond exposure that would often be hard to build yourself with individual bonds. In addition, bond ETFs can be bought and sold on the exchange every day.
Can you start investing in bonds with a small amount?
Yes. You can start investing in bond ETFs for the price of one ETF unit, which lowers the barrier compared with individual bonds, where minimum investments can be large.
What do the yield tiers mean?
Yield tiers help you see the risk and return potential of bond ETFs. The lower-risk tiers include, for example, cash and the money market. Higher return potential is offered by, for example, medium-term corporate bonds, which can also include high yield bonds.
Who might a bond ETF suit?
A bond ETF can suit an investor who is looking for diversification, a more stable return component or an alternative for idle cash in their portfolio. Whether it suits you depends on your goals, time horizon and risk tolerance.
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. The calculators and comparisons are illustrative.
Your progress is saved in this browser.