What are US bond ETFs and how can Indian investors invest in them?

Investing in bonds has always been considered safer and more conservative compared to investing in equities. 

The US equity and debt markets are no different, in that, conservative investors in the US also prefer parking their funds in instruments that purchase US treasuries over volatile and unpredictable equities.

For investors, keen on investing in the US debt markets, there are two ways to do so — you can opt for the bond mutual fund route or they can opt for the bond ETFs route.

Before we closely examine why investing in bond ETFs has many more advantages over investing in bond mutual funds, let us have a look at the types of US debt securities that bond funds and ETFs invest in.

Types of US debt securities

  • Treasury bonds are US government debt securities that have a maturity of 20 or 30 years. They have semi-annual interest payments until maturity.
  • Treasury notes are US government debt securities that mature from anywhere between two to 10 years.  They also have semi-annual interest payments but have yields that are lesser than T-bonds.
  • Treasury bills have the shortest maturity period from four weeks to a year. 
  • Treasury Inflation-Protected Securities are US government debt securities where the price of the bond is adjusted. The interest rate on a TIPS instrument is fixed but the interest payment keeps changing with variations in the bond price.

Bond mutual funds 

US-based mutual funds have been funnelling their investments into bonds for several decades. In fact, balanced funds, a type of mutual fund, have been investing in bonds and stocks going as far back as the 1920s.

While bond mutual funds are highly liquid, these funds are priced and traded only once a day. The Net Asset Value (NAV) of the fund is determined after the closing of the market hours. The dynamics of the bond mutual fund are quite interlinked. The trading price is determined by the NAV, which, in turn, is determined by the value of the bonds in the fund.

Investors must also note that there are a few bond funds in the market that levy an extra fee if the investor sells his holdings before a prescribed period, generally, 90 days. Bond funds do this to discourage investors from trading in the segment, and to cut back on the costs that come with excessive trading.

Bond ETFs

Compared to bond mutual funds, bond ETFs are younger entities that first emerged in the US markets in 2002, with iShares launched the first bond ETF. 

Bond ETFs often track indices, and fall under the category of passive investments. Consequently, these ETFs charge lower fees compared to bond mutual funds, which are often actively managed funds.

Just like stocks, ETFs are traded throughout the course of the day, and their prices fluctuate on a second-by-second basis. Unlike a bond mutual fund, there is no minimum or maximum holding period, and the investor can sell the bond ETF at any time without incurring a penalty.

Bond ETFs can also be purchased on a margin, and allow for short selling as well furnishing higher flexibility from a trading perspective compared to bond mutual funds. Another key point to note here is that bond ETFs disclose their holdings daily, unlike bond mutual funds, which reveal their holdings on a monthly or semi-annual basis.

Where can Indian investors benefit from investing in US bond ETFs?

Several bond ETFs on the Appreciate app can help Indian investors park their funds in safe and consistently paying debt securities issued by the US government. Some of these ETFs include:

  • IShares Core Total US Bond market ETF
  • SPDR Portfolio Short-Term Treasury ETF
  • SPDR Bloomberg Barclays Intermediate Term
  • Vanguard Mortgage-Backed Securities ETF
  • US Total Bond Market Index ETF Vanguard

Disclaimer: Investments in securities markets are subject to market risks. Read all the related documents carefully before investing. The securities quoted are exemplary and are not recommendatory.

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