The main differences
The main differences are as follows:-
They often have wider buy-sell spreads due to lower liquidity of the underlying portfolio (refer to this article How to Buy ETFs for a further explanation re spreads)
Intra-day Net Asset Values (NAV) of the bond funds may not be available or reflect the true fair value, making it hard to know if you are receiving fair value (read this article How ETF’s Work to understand Intra-day Net Asset Values)
Bonds are arguably more complex than shares for the following reasons: there are many more bonds and types of bond available than there are shares available, fixed income markets are globalised making geography a complex dimension to manage, bond portfolio turnover is often higher than an equity index fund and there is lack of transparency in bond pricing.
Governments around the world are printing money (read quantitative easing) to keep the wolves at bay, which is distorting the risk/return equation for all investors but particularly bond investors.
Bond Buy Sell Spreads
Bond ETFs are similar to equity ETFs in many respects. The most important difference is how the underlying bonds are priced. Bonds aren’t traded on a central stock exchange and therefore, determining the price of the bonds within an ETF depends on prices provided by third party brokers.
Accordingly bond funds may have less liquidity in their underlying portfolios which may increase the buy – sell spread you have to pay (refer to How to Buy ETFs)
Bond ETF Intra-day Net Asset Values (NAV)
Also Intra-day Net Asset Values (NAV) of the bond fund may not be available, making it harder for you to ensure you are paying or receiving fair value. The NAV of each ETF unit is worked out by calculating the total value of the bonds in the underlying portfolio then dividing by the number of ETF units on issue.
The issues facing investors in bond ETF’s are definitely more complex than investing in equity ETF’s.
The reasons for the additional complexity are as follows:-
There are many more bond securities in the global bond universe than there are shares
The diversity of bond issuers and the types of securities they issue is enormous, there are vanilla government bonds, through to non-investment grade corporate debt which may/may not be convertible into equity
There can be a high turnover of securities as new bonds are issued and old bonds mature
There is a lack of central exchange with clear transparent pricing of bonds
There are highly developed derivatives markets
Fixed income markets are more global than equities which makes distinguishing bonds based on geography complicated