The truth is that there is a lot of work going on behind the scenes to make this happen. Bond indexes can hold hundreds and sometimes thousands of bonds, some of which are illiquid or thinly traded. As a result, a bond ETF manager is required to construct a portfolio that tracks the index as closely as possible using only the securities that are available at any given time. This can be particularly tricky in certain situations (for example, an illiquid market segment like high yield), but a good PM is able to navigate a range of market environments.
Bottom line: Bond ETFs do have portfolio managers, and a skilled one will work to minimize tracking error on an ongoing basis so that investors get the exposure they’re seeking.
Of course, there’s much more to the story than this, but these three points really get to the heart of what a bond ETF is.
Matt Tucker, CFA, is the iShares Head of Fixed Income Strategy and a regular contributor to The Blog.