How to invest in bond ETFs

Bond funds don’t behave like individual bonds. Target maturity ETFs can solve that problem

Rising stacks of British Pound coins
(Image credit: Getty Images)

The return you get when buying a bond and holding it to maturity is set at the outset: it’s the yield to maturity when you buy. Yet the market value of the bond between now and maturity can vary greatly as short-term and long-term interest rates change. Investing in a bond fund, which holds a portfolio of bonds of different maturities, makes this even more complicated since the value of the fund will depend on how the value of all the bonds it holds is shifting.

To see this in practice, consider an exchange-traded fund (ETF) such as iShares Core UK Gilts compared to a 10-year government bond. The ETF doesn’t just hold 10-year bonds, but its average maturity is roughly that – 11.5 years now – so it should be a fair comparison (although the exact composition of its portfolio and the way that this has changed over time will affect whether it’s really a good match).

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Cris Sholto Heaton

Cris Sholto Heaton is an investment analyst and writer who has been contributing to MoneyWeek since 2006 and was managing editor of the magazine between 2016 and 2018. He is especially interested in international investing, believing many investors still focus too much on their home markets and that it pays to take advantage of all the opportunities the world offers. He often writes about Asian equities, international income and global asset allocation.

Cris began his career in financial services consultancy at PwC and Lane Clark & Peacock, before an abrupt change of direction into oil, gas and energy at Petroleum Economist and Platts and subsequently into investment research and writing. In addition to his articles for MoneyWeek, he also works with a number of asset managers, consultancies and financial information providers.

He holds the Chartered Financial Analyst designation and the Investment Management Certificate, as well as degrees in finance and mathematics. He has also studied acting, film-making and photography, and strongly suspects that an awareness of what makes a compelling story is just as important for understanding markets as any amount of qualifications.