Bond ETFs: They're Working Like They Should | ETF Trends

Worried that your bond-related exchange traded fund (ETF) isn’t exactly mirroring the actual underlying bond assets? Well, turns out that ETFs may be a more accurate indicator of how much investors value bonds.

According to Financial Advisor, funds that hold a basket of bonds don’t always perfectly reflect the performance of the underlying holdings, and discrepancies may also be magnified during extremely volatile market conditions.

Fund providers argue that ETFs are in reality a better indicator of the bond market’s sentiments since the quotes received for the bond ETFs’ underlying values may often be estimates based on out-of-date prices offered by large bond dealers. ETF values take into account recent trading prices, quotes from bond dealers and other market data, such as Treasury prices and interest-rate swaps. [What to Do About a Treasury ETF Bubble?]

Basically, ETFs  provide a more accurate up-to-date price for bonds sold now. Not all bonds trade constantly, so the NAV may not necessarily be the most current price. Authorized participants will help keep prices in line with an ETF’s underlying assets, but in markets where bonds trade less often, prices become harder to gauge. [Muni ETF Shows Active Management’s Benefits.]

Bond ETFs provide an essential service for investors who have sought more conservative investments in the last two years. Currently, almost 130 fixed-income ETFs provide exposure to pieces of the market, such Treasurys or the newer Build America Bonds.