ETFs & Funds
Bond ETFs Explained: Duration, Yield and What You Actually Own
You own a rolling portfolio that is always being replaced, so there is no date when your money comes back. Duration is the number that tells you what that costs.
When do I get my money back?
It is the first question people ask. There is no such date. A bond ETF holds hundreds or thousands of bonds, pays out the interest it collects, usually monthly, and never matures, because the portfolio is permanently being replaced and no day arrives on which the fund hands your principal back and closes the account.
A single bond gives you a date
Buy a 10 year Treasury note. You hold a contract. Coupons arrive twice a year. On a fixed date you receive the face value. If rates rise and the price falls in the meantime, you can simply wait. The issuer still owes you the full amount.
A bond ETF tracks an index with a maturity band, say bonds with one to ten years left to run, and as each holding ages past the lower edge of that band the index drops it, the fund sells it, and newer bonds take its place. The average maturity therefore stays roughly constant forever.
So the escape hatch, holding to maturity and being made whole, does not exist. Your only exit is a sale at the market price.
What you get in exchange is worth having: instant diversification across many issuers, income every month, and the ability to buy $500 of exposure where an individual bond might demand $5,000. The underlying mechanics of coupons and prices are in how bonds work.
Duration, with the arithmetic
Effective duration estimates the percentage price change for a one percentage point move in yields, in the opposite direction. Every fund page publishes it. It usually sits within an inch of the yield.
Take $10,000 in an intermediate bond fund with a duration of 6.0 and an SEC yield of 4.5%.
Rates rise 1% across the curve. The price change is about -6.0 x 1% = -6.0%, so -$600. Over
the following year you also collect roughly 4.5% x $10,000 = $450 of interest. You are down
about $150, a loss of 1.5%.
Rates fall 1% instead. The price gains about +6.0%, so +$600. Plus $450 of income, that leaves
you +$1,050 or 10.5%.
The break-even move, the rise that exactly cancels a year of income, is 4.5% / 6.0 = 0.75%.
Anything larger than that inside a year and you finish down.
Two refinements. Duration is a first approximation, and convexity makes the real price fall a little smaller than the straight-line estimate, which helps you in both directions. And a fund yielding 4.5% carries a much thicker income cushion than the same fund offered when yields were near zero, so the identical product is a different proposition at different points in the rate cycle. The full treatment sits in duration and interest rate risk.
The partial answer to the missing date
There is a real consolation here. It deserves to be understood properly.
When rates rise, the fund’s price falls. From that moment the fund is buying replacement bonds at the new, higher yields. Given enough time, that extra income offsets the price loss. The rough horizon over which the two cancel out is close to the fund’s duration, so a fund with a duration of 6, held for about six years, should end up near the yield it advertised on the day you bought it, as long as rates do not keep climbing the whole way.
Which gives you a usable rule. Match the fund’s duration to how long you actually intend to hold it, and most of the interest rate risk stops being your problem.
Which yield number to trust
Fund pages quote several yield numbers. They are answering different questions.
| Measure | What it tells you | Watch out for |
|---|---|---|
| SEC 30 day yield | Standardized, net of expenses, comparable across funds | Backward looking by 30 days |
| Yield to maturity, weighted average | What the current portfolio would earn if held and nothing defaulted | Gross of fees, and the portfolio will be replaced |
| Distribution yield | Cash actually paid over the past 12 months, annualized | Inflated when the fund holds premium bonds, since part of each coupon is return of your own capital |
| Current yield | Annual coupon divided by price | Ignores the pull to par entirely |
Use the SEC yield to compare one fund with another, and the weighted average yield to maturity to understand what the portfolio is earning. Subtract the expense ratio from any gross figure before you believe it. The full set of definitions is in bond yields explained. You can price an individual bond in the bond yield calculator.
The main types, and what each is for
| Type | Typical duration | Main risk | What it is for |
|---|---|---|---|
| Aggregate bond | 6 to 7 | Interest rates | One-fund core holding of the US investment grade market |
| Short-term Treasury | Under 2 | Very little | Cash you need within a couple of years |
| Long-term Treasury | 15 and up | Interest rates, severely | A deliberate bet on falling rates, or a stock hedge |
| TIPS | Varies by fund | Real rates | Protecting purchasing power against inflation |
| Investment grade corporate | 7 to 8 | Rates plus credit spreads | Extra yield over Treasuries for moderate credit risk |
| High yield corporate | 3 to 4 | Default and spread widening | Income, with equity-like behavior in a recession |
| Municipal | 5 to 7 | Rates plus local credit | Federally tax-free income for higher-bracket taxable accounts |
| Floating rate | Near 0 | Credit | Income that rises with short rates |
Credit risk and the way spreads behave are covered in corporate bonds and credit spreads, and the tax arithmetic behind muni funds is in municipal bonds explained.
When the price and the NAV disagree
Most individual bonds trade rarely. A fund’s published NAV leans partly on estimated prices. The ETF itself trades continuously with real buyers and sellers on both sides.
In calm markets the gap between the two is small enough to ignore. Under serious stress, bond ETFs have traded at visible discounts to their published NAV, which happened across investment grade and municipal funds during the March 2020 disruption. Whether the ETF was wrong or the NAV was stale is a genuine argument. The practical lesson lands the same way either side wins: selling a bond ETF during a liquidity panic can mean accepting a price well below the figure printed on the fund page.
Where bond ETFs fail
They fail as a substitute for a maturity date. If you need exactly $30,000 in four years, a fund with a duration of 6 can easily be down on the day you need the money, and a fund does not care that the money is for a deposit, a tuition bill or a roof. Individual Treasuries or a defined maturity fund fit that job. The choices are in Treasury securities.
They fail as a stock hedge when inflation is the problem. Bonds cushioned equity declines reliably while falling growth drove the selling. In an inflation shock the two fell together.
High yield funds fail at the worst possible time. Defaults cluster in recessions, so the fund you bought for income drops alongside your stock funds.
Expense ratios matter more here than in equities. A 0.40% fee on a fund yielding 4.5% takes about 9% of your income, against a far smaller share of a stock fund’s expected return. Put the numbers into the expense ratio calculator before you choose.
This week, find the effective duration of every bond fund you own, multiply it by 1% and then by your balance, and write that dollar figure somewhere you will see it. That is roughly what a one point rate rise costs you. If the number is larger than you expected, the fix is a shorter duration fund. The wider question belongs in asset allocation. The yield curve tool shows the shape of the curve you are lending into.
Frequently asked questions
What is a bond ETF?
It is an exchange-traded fund holding a portfolio of bonds, bought and sold on an exchange like a stock. It pays out the interest it collects, usually monthly. Unlike a single bond, the fund has no maturity date because it continually sells bonds that have aged out of its index and buys newer ones.
Do bond ETFs mature and return my principal?
A standard bond ETF never matures, so there is no date on which you are repaid. Your exit is selling shares at whatever price the market offers. Defined maturity bond ETFs are the exception: they hold bonds that all come due in one year, wind down and pay out, which behaves more like owning a bond ladder.
What does duration mean for a bond ETF?
Duration estimates how much the fund's price moves for a one percentage point change in interest rates. A fund with a duration of 6 should fall roughly 6% if rates rise 1% and rise roughly 6% if they fall 1%. It is the single most useful number on a bond fund page, and it appears right next to the yield.
Which yield number should I look at?
The SEC 30 day yield is the standardized figure, calculated the same way by every US fund and net of expenses, so it is the one that allows a fair comparison. Distribution yield reflects what the fund has paid out over the past year and can be flattered by bonds bought at a premium. Yield to maturity describes the portfolio rather than what you will receive.
Are bond ETFs safer than stock ETFs?
They are usually less volatile, and they are not safe in the ordinary sense of that word. A long duration Treasury fund can fall 20% or more when rates rise sharply, and a high yield corporate fund carries real default risk that shows up in exactly the recessions when stocks are also falling.