People often confuse bond funds with bond ETFs. Though the two kinds of funds do bear many similarities, they also have a lot of differences.

Bond funds

Bond funds are also called mutual funds. Investors collect a pool of capital and put it into the fund for managers to allocate. The money collected can be allocated to many securities such as bonds and stocks.

Bond funds provide many investment options, including actively managed funds as well as the passive index funds. The actively managed fund always tries to beat the benchmarks, while the index fund just seeks to replicate them.

Bond funds often have two structures: open-ended funds and close-ended funds. Open-ended funds can be directly purchased from fund issuers without a brokerage account.

The underlying holdings of bond funds are not revealed every day but are released semiannually. Some funds may be reported every month.

Investors usually find it hard to determine the exact composition of their portfolios with bond funds due to a lack of transparency.

Bond ETFs

Bond ETFs have a shorter history than bond funds. Most of the bond ETFs are used to replicate bond indices, but recently there are increasing numbers of products that are actively managed.

Bond ETFs should be bought through a brokerage account, and they have to be traded on the open market.

Bond ETFs are traded on a daily basis. The share prices can vary significantly. Besides, the shares can also be traded at a discount to the holdings’ underlying net asset value.

If investors sell the ETF right after they purchase it, there will be no penalty required for the action. Besides, compared with bond funds, bond ETFs are more flexible than bond funds because bond ETFs can be purchased on a margin that borrows money or securities from brokers.

Generally speaking, bond funds provide more options for active management than bond ETFs, whereas ETFs enable investors to purchase and sell funds more frequently. In terms of transparency, ETFs are better than bond funds since ETFs enable investors to see their holdings conveniently. Yet if you cannot find enough buyers in the market, bond funds with their open-ended structures may be a better choice. 

Since both bond funds and bond ETFs have their pros and cons, you are supposed to select a suitable fund based on your situation. You may do some research and ask your financial advisor for help.

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