For norm ETFs, it is made up of a basket of stocks. In the case of bonds, is that how bonds ETFs are like as well? If that is the case, isn't it problematic because bonds are constantly maturing? - Seedly
 

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Asked by Anonymous

Asked on 21 Mar 2019

For norm ETFs, it is made up of a basket of stocks. In the case of bonds, is that how bonds ETFs are like as well? If that is the case, isn't it problematic because bonds are constantly maturing?

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Alvin Tan
Level 4. Prodigy
Answered on 15 Jan 2020

A more direct answer to whether its problematic is "yes, but not because bonds are constantly maturing." The real issue is balancing the return and the duration of a bond portfolio, that is, the sensitvity of the portfolio to interest rate cahnges. The use of different maturities is necessary to acheive the desired yield of the portfolio while maintaining an palatable duration

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https://www.etf.com/etf-education-center/how-do-bond-etfs-work

All you need to know.

How Do Bond ETFs Track Their Indexes?

Traditional bond indexes make great benchmarks, but terrible portfolios. Most equity ETFs hold every security in their index. But that's usually not possible with bonds. Bond indexes often include hundreds, even thousands, of individual securities. Buying up all those bonds for an ETF's portfolio is not only difficult, but expensive. The cost to purchase thousands of bonds in illiquid markets, even those with minimal impact on the index, can quickly erode returns.

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