A bond ETF is basically an exchange-traded fund that invests a collection of bonds that are a part of the underlying index it tracks. Bond ETFs tend to invest across corporate, public sector and government bonds. Kavan Choksi points out that bond ETFs are similar to stock ETFs in the manner that they are managed and traded passively on the stock exchanges. On the other hand, mutual funds and individual funds trade at one price (NAV) each day after the market closes. Bond ETFs prove to be a low-cost solution for investors to have passive exposure to benchmark bond indices. Hence, investors must try to have some allocation for bond ETFs in their portfolio.

Kavan Choksi talks about how investing in bond ETFs shall be a prudent move

Bond ETFs are passive funds that tend to invest in bonds in a manner similar to traditional bond mutual funds. Unlike typical open-ended bond mutual funds, however, bond ETFs do trade on the stock exchange. This makes it easier for investors to purchase and sell them. Moreover, these ETFs have comparatively lower costs than actively managed funds.

Much like equities ETFs, bond ETFs also focus on tracking the benchmark index as closely as possible. A lot of such ETFs tend to track indexes that follow a particular segment. For instance, public sector, corporate or government bonds. The ETFs may also track particular maturity buckets of bond, like long, medium and short-term bonds. There also are bond ETFs available with particular maturities, like three years, five years and tend years. These bonds are known as target maturity bond ETFs. They are similar to fixed maturity plans, but have the advantage of liquidity. This makes them a good addition to an investor portfolio.

Similar to majority of the fixed-income securities available, bond ETFs are also a low-risk investment option. Therefore, these ETFs are an ideal investment instrument for people who do not wish to take too much risk exposure. Any investor with low-risk tolerance levels who want to enjoy regular income from their investments can consider investing in bond exchange-traded funds. Kavan Choksi further points out that as such ETFs trade on the stock exchanges, they provide high liquidity as well. Moreover, as these ETFs can have specific maturities, investors are provided with the chance to select the ideal option on the basis of their investment horizon. For example, if one has a long term investment horizon, they can go for a long term bond ETF or a 10 years specific maturity bond ETF, which shall align with their investment goal. As bond ETFs hold assets with different maturity dates, they pay interest every month, with the value of the coupon varying each month. Bond ETFs pay out interest in the form of a monthly dividend, while capital gains are paid in the form of annual payouts. Bond ETFs do have lower costs than actively managed bond mutual funds as they track an index using a passive investing method.

Gaining a good understanding of the investment objective of the bond exchange-traded fund is important for all investors prior to putting their money in this investment instrument. They need to have a clear investment strategy in mind while selecting a bond ETF.