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Matt’s master class: The 3 key elements of a bond ETF

Matt Tucker, CFA of BlackRock

Matt’s master class: The 3 key elements of a bond ETF (Part 1 of 4)

As the head of fixed income strategy for the largest ETF provider in the world, I sometimes take for granted the fact that bond ETFs are still something of a mystery to many savvy investors.  This is partially due to the fact that these funds are still relatively new: iShares launched the first bond ETF only 11 years ago, about 75 years after the first mutual fund was launched.  And although fixed income ETFs have come a very long way in a very short time, it’s understandable that the investing public is still getting to know them.

In order to fully appreciate the benefits that bond ETFs can offer, it’s important to first understand how they work.  This post is the first in a “master class” series designed to help investors do just that, by covering everything from the basics to the more advanced topics.

Market Realist – The graph above shows the top ten bond ETFs by net assets. The Vanguard Total Bond Market ETF (BND) and the iShares Core U.S. Aggregate Bond ETF (AGG) are the top two funds with assets above $20 billion. Both these ETFs track the Barclays Capital U.S. Aggregate Bond Index, which measures the performance of U.S. investment-grade bonds.

These ETFs provide a lot of flexibility to investors by giving them lots of options. There are ETFs available from low-risk Treasuries to high yield bonds. The SHY 1–3 year Treasury bond ETF (SHY) is for publicly issued bonds with remaining maturities ranging from one to three years. It tracks the Barclays Capital U.S. 1–3 year Treasury bond index. Similarly, there’s the iShares 7–10 Year Treasury Bond ETF (IEF), which tracks the Barclays Captial U.S. 7–10 Year Treasury bond index. There are some investment funds that also invest in debt securities in foreign currencies, like the WisdomTree Euro Debt Fund (EU).

Read on to the next part of this series to learn more about the key characteristic of bond ETFs that every investor should know.

Continue to Part 2

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