How to Compare Bond ETFs

Type of Bonds

• The types of bonds in different ETFs are compared to assess credit risk. Bond types with distinctive credit risk include US corporate bonds, foreign bonds, municipal bonds, and US treasury bonds. In addition, each bond within a category---such as corporate bonds and municipal bonds---has an individually assigned credit rating. Weighted average credit ratings are provided to compare bond ETFs.
  
  

Leverage

• Some bond ETFs use leverage to multiply the gains from a group of bonds. A leveraged ETF uses borrowing in addition to shareholder funds. Leveraging can magnify losses as well as gains.
  
  

Operating Expenses

• The operating expenses for an EFT are generally low because it simply tracks and indexes a single category of security. Investment selections are not actively managed. However, administrative costs can vary from one bond ETF to another, even among ETFs with the same bond type.
  
  

Duration

• Duration measures the sensitivity to interest rate fluctuations of an ETF. This calculation relies most heavily upon the remaining maturity of bonds in the ETF and is therefore expressed as a number of years.
  
  To compare bond ETFs, a rise in interest rates will cause the largest decline in value for ETFs with longer duration.
  
  

Yield and Total Return

• Current yields of bond ETFs express their percentage returns from currently declared dividends. This does not compare recent gains in EFT value.
  
  Total return calculates investor gain from dividends plus price appreciation. However, this is only an historical measure because future price gains are unknown.