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Bond Funds vs. Bond ETFs: What are the Differences?

Yashovardhan Sharma
Written By Yashovardhan Sharma - Nov 28, 2024
Bond Funds vs. Bond ETFs: What are the Differences?

Both bond mutual funds (or simply, bond funds) and bond ETFs have bonds or another type of debt securities in their investment portfolio but there are distinctions that active investors should be aware of. Bond funds are mutual funds where a manager combines multiple investor’s money and invest the pooled money in fixed income instruments. On the other hand, a bond ETF is a fund that tries to mimic an index of bonds in order to mirror the performance of that index.

Learning About Bonds

It’s worthwhile to take a short break and make sure we understand what a bond is before moving further to bond funds and bond ETFs. A bond is an effective financial obligation closely associated with an IOU through which governments or companies can borrow money. When you purchase a bond, you are supplying the issuer money for the rights to receive interest payments and the bond’s face value at its due date. Bonds are generally considered to have a lower level of volatility compared to individual equities, and their own returns are predictable interest payments.

Defining Individual Bonds

Bonds usually pay interest twice a year and have fixed principal values (also called face or par values) that are repaid at maturity. Even though par values are fixed, the price of a bond can change in the secondary market based on interest rates. If rates go up, bond prices usually go down, and vice versa. As a bond gets closer to its maturity date, its price generally moves closer to its par value. Holding a bond to maturity can have an opportunity cost: If rates rise, you might miss out on higher interest payments from newer bonds.

The main benefits of owning individual bonds, assuming no default, are:

  • Reliable income: If you have regular expenses, like college tuition, a steady income stream can be really helpful.
  • Predictable value at maturity: If the bond isn't callable, you'll get the par value at maturity, which can help you ignore price fluctuations if you plan to hold it to maturity.
  • Your own cost basis: The bond cost factor includes the original price you paid for the bond, and any variation in price between premium and discount qualifies as the cost basis when it comes to taxes.

The downsides to owning individual bonds are:

  • Need for diversification: To go across asset classes and issuers, you obviously require many bonds, which is costly and difficult in most instances.
  • Less attractive pricing: Institutional investors usually get better prices because they buy in large quantities. It's important to check the price you're paying for individual bonds.
  • Time-consuming research: There are thousands of bonds from many issuers, each with its own characteristics. Researching and managing a bond portfolio can take a lot of time.

You May Also Like: Master the art of ETF trading with these 5 proven strategies

ETF or exchange traded fund concept with pile of coins and newspaper

Looking at Bond ETFs

Bond ETFs are basically bundles of bonds that you can trade on an exchange, just like stocks. It provides you with a range of distinct bonds or allows you to trade the existing bonds during the day. Neither are bond funds like mutual bond funds whose prices are frequently changing constantly during the trading day.

Pros of Bond ETFs:

  • Trading Flexibility: You can purchase and liquidate them at any time of the trading period.
  • Lower Fees: Often, their operating expense is lower than that of bond funds.
  • Price Transparency: It’s possible to view prices and how they progress during trading sessions.

Cons of Bond ETFs:

  • No Active Management: They may lack flexibility when it comes to responding to the changes within the market.
  • Trading Costs: Every trade that one took might have a commission.
  • Price Discrepancy: The market price can be different from the actual value of the bonds.

Bond Mutual Funds

Bond mutual funds hold a bunch of different bonds from various issuers, with different maturity dates, interest rates, and credit ratings. Unlike individual bonds that pay interest twice a year, bond funds usually make monthly payments, which you can take as cash or reinvest.

Pros of Bond Funds:

Diversification: You get a wider mix of bonds for your money.
Better Pricing: Funds generally get better deals on bonds compared to individual investors.
Professional Management: Experts manage the fund, which is especially useful for riskier bonds. They can buy or sell bonds based on market conditions, potentially boosting returns.

Cons of Bond Funds:

Management Fees: Actively managed funds can have higher fees, which might eat into your returns.
Fluctuating NAV: The net asset value changes with the market, so there's no guarantee on what it’ll be in the future. This makes planning harder compared to individual bonds.
Complex Taxes: Your tax basis is more complicated because the fund pools money to buy bonds. Plus, you don't control when bonds are bought or sold, which can lead to unexpected capital gains taxes.

Individual Bonds vs. Bond Mutual Funds

Management Style

Individual Bonds: Managed by the investor.
Bond Mutual Funds: Professionally managed, can be active or passive.

Minimum Investment Amount

Individual Bonds: Preferably large.
Bond Mutual Funds: Small.

Fees and Costs

Individual Bonds: Usually a commission to buy or sell, but no ongoing fees.
Bond Mutual Funds: Management fees and sales fees depending on the share class.

Income Frequency

Individual Bonds: Typically semiannually.
Bond Mutual Funds: Typically monthly.

Predictable Market Value at Maturity

Individual Bonds: Yes, unless there's a default.
Bond Mutual Funds: No.

Option for Automatic Coupon Reinvestment

Individual Bonds: No.
Bond Mutual Funds: Yes.

Cost Basis

Individual Bonds: Individual cost basis for each bond.
Bond Mutual Funds: Cost basis is based on the price paid for the share of the fund.

Customization

Individual Bonds: Yes.
Bond Mutual Funds: No.

Diversification

Individual Bonds: Harder to achieve.
Bond Mutual Funds: Easier to achieve.

Investments Should Be Based on Your Preferences

 All the pros and cons for individual bonds and bond funds need to be placed into the context of your preferences and circumstances. What works well for you might not work well for others, and vice versa. The table above is a good starting point for deciding what is better for you. There are three important considerations when determining whether an individual bond or bond fund is better for you: the amount you have to invest, your financial goals, and your behavioral preferences.

The amount of assets you have to invest in your bond portfolio is a key consideration when determining whether to invest in individual bonds or bond funds. Individual bonds have denominations that can be cost-prohibitive for some investors. Add in how many individual bonds an investor needs for sufficient diversification, and the dollar amount continues to rise. For some, it might make sense to use a more accessible bond fund or a combination of bond funds with individual bonds.

Factors to Consider

Financial goals are another important factor to consider. If you are looking for predictable value and certainty for your financial goals, then individual bonds may be a better fit. Meanwhile, if you are looking for professional management and want greater diversification for your financial goals, then bond funds may be a better fit.

Behavioral preference is another important consideration. If seeing the NAV of your fund fluctuate and having no control over certain tax consequences makes you uncomfortable, then bond funds might not be the best solution for you. It is important to realize that while you cannot eliminate the emotions involved in investing, you can recognize how a certain investment might make you feel and adapt your investment choices accordingly.

In the long run, the difference in performance between a portfolio of individual bonds and a bond mutual fund with the same duration and credit quality, held for the same amount of time, is likely to be small, because most of what an investor gets out of investing in bonds is the income generated by coupon returns, rather than the price change. The key is to make sure the investment vehicle you choose aligns with your goals and time frame.

Similar Reads You May Enjoy: The 5 Best Dividend ETFs for 2024 | Top Dividend Paying ETF

Conclusion

Choosing between Bond Funds and Bond ETFs really comes down to what you're looking to get out of your investments, how much risk you're okay with, and whether you prefer hands-on management or more flexibility in trading. The more you understand about each option, the better you can match them to your financial goals.

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The actual risk of total loss stays incredibly close to absolute zero.Do these tools offer any voting rights for shareholders?Technically yes, but the massive fund provider casts the actual corporate votes. Massive firms like Vanguard or BlackRock hold the proxy voting power for millions of individual shares. The retail buyer completely hands over their corporate voting rights when choosing a purely passive pool instead of picking single stocks.What happens to the tracker when a company drops out of the benchmark?The backend computer algorithms handle the switch completely automatically. When a failing company gets aggressively booted from a major list, the fund quietly sells those exact shares and quickly replaces them with the newest addition without requiring any manual action from the individual buyer.Are exchange-traded trackers completely identical to mutual fund versions?No. Exchange-traded tools trade live all day long just like normal individual stocks. 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The platform combines a beginner-friendly interface with strong U.S. regulatory compliance and more than 400 cryptocurrencies. Its standard trading fees are not the lowest available. However, its straightforward interface can make it easier for new investors to navigate.Expert Review: Coinbase stands out when simplicity matters as much as functionality. It is particularly appealing as the best platform to trade crypto for beginners who want access to major cryptocurrencies without having to navigate a highly complex trading interface.2. Kraken - Best for Coin SelectionBest for: Broad cryptocurrency selectionTrading fee: 1% flat fee in Forbes Advisor's comparisonCoins: 600+Staking: YesRating: 4.6/5Kraken takes the lead for investors who want access to a large selection of cryptocurrencies. Forbes Advisor lists more than 600 tradable assets.Kraken also offers staking. Its current fee structure notes that staking commissions are deducted from rewards, while flexible staking can carry a 20% commission on applicable assets.Expert Review: Kraken makes more sense for investors who have moved beyond basic Bitcoin and Ethereum purchases and want broader asset access.3. Gemini - Best for Regulatory ComplianceBest for: Regulation-focused investorsTrading fee: Varies by trading method and volumeStaking: YesGemini has built its reputation around compliance and security. Its staking service currently supports assets including ETH, SOL, and MON, with rewards potentially reaching up to 7% APR depending on the asset and conditions. The platform deducts a staking service fee from earned rewards.Expert Review: Gemini may appeal to users who place regulatory considerations and a straightforward experience above having the largest possible coin selection.4. Crypto.com - Best for Staking OptionsBest for: Staking and rewardsTrading fee: 0.25% maker and 0.50% taker for lower-volume tradesCoins: 400+Staking: YesRating: 4.4/5Crypto.com combines a broad asset selection with multiple staking opportunities. Forbes Advisor reports support for more than 400 cryptocurrencies and identifies it as its top choice for staking options. Its staking program includes assets such as Ethereum, Solana, Cardano, Polkadot, Avalanche, Cosmos, and others. Unbonding periods vary by asset. Expert Review: This is worth considering if earning rewards is an important part of your crypto strategy rather than simply buying and selling.5. Bitstamp - Best for Asset ProtectionBest for: Asset protectionTrading fee: VariesCoins: 160+Rating: 4.8/5Bitstamp is one of the longer-established names in the crypto exchange market. Forbes Advisor highlights its reliability and asset-protection policies and gives it a 4.8-star rating.Expert Review: Bitstamp may suit investors who prefer an established platform and do not need hundreds of newer or niche cryptocurrencies.6. Binance.US - Best for Overall SatisfactionBest for: Fee-conscious active tradersTrading fee: Tier 1 pairs can be 0% maker and 0.02% takerCoins: 190+Staking: YesRating: 4.3/5Binance. The US offers particularly competitive spot trading fees. Its current fee page lists 0% maker and 0.02% taker for Tier 1 pairs, while certain Tier 0 pairs have 0% maker fees. Staking service fees range from 9.95% to 39.95% of earned rewards depending on the asset.Expert Review: Low trading costs can make Binance. The US is attractive to active traders, but beginners should study its tiered fee structure before placing trades. It is the best platform to trade crypto for beginners with satisfaction.7. Robinhood - Best for Recurring InvestmentsBest for: Recurring crypto purchasesCoins: 50+Rating: 4.3/5Robinhood stands out for recurring investments. Forbes Advisor notes that users can automate purchases, such as investing $10 in the same cryptocurrency every week or month. Expert Review: It can be useful for investors interested in dollar-cost averaging and managing crypto alongside traditional investments.8. Webull - Best for Advanced ChartingBest for: Charting and trading toolsCoins: 70+Rating: 4.1/5Webull offers advanced charts and market information across its desktop and mobile platforms. Forbes Advisor reports that users can begin building a crypto portfolio with as little as $1, depending on transaction requirements.Expert Review: Its analytical tools may be more appealing to active traders than complete beginners.9. Interactive Brokers - Best for Low FeesBest for: Low-cost tradingTrading fee: About 0.12%-0.18%, depending on trade valueCoins: 20Staking: NoRating: 3.8/5Interactive Brokers has one major advantage: cost. Forbes Advisor reports commissions of roughly 0.12% to 0.18%. The trade-off is limited cryptocurrency selection and no staking.Expert Review: It can make sense for experienced traders who already use the platform for stocks and other assets and want crypto exposure without opening another account.10. Uphold - Best for Alternative AssetsBest for: Diversified alternative assetsCoins: 250+Staking: YesRating: 3.6/5Uphold supports cryptocurrencies alongside other asset categories. Forbes Advisor reports more than 250 tradable crypto assets and more than 20 coins available for staking. Expert Review: Uphold may work well for investors who want multiple asset classes in one platform rather than a crypto-only experience.Essential Reads: How to Find New Cryptocurrency for Investment: What to KnowHow to Choose Among the Best Crypto ExchangesThere is no single winner for every investor.Start with your objective. If you are new to crypto, prioritize usability and education. If you trade frequently, compare maker and taker fees carefully. If you want a wide selection, look at the world's largest crypto exchanges by supported assets.For staking, check more than the advertised reward rate. Review commissions, lockup periods, eligibility, and unstaking rules. Coinbase, for example, states that its standard staking commission is 35% for several supported assets. Finally, check whether the platform is actually available in your state or jurisdiction. A platform can look excellent on paper and still be unsuitable for your circumstances.Try This: Cryptocurrency Regulations: Global Rules & Legal ImpactsConclusionThe best crypto exchange depends on what you need from it. Coinbase offers a strong all-around experience for beginners. Kraken is compelling for investors who want extensive coin selection. Crypto.com stands out for staking, while Binance. US can appeal to fee-conscious traders. Interactive Brokers is another option when keeping trading costs low is the priority.The bigger lesson is simple: do not choose an exchange because it has the lowest fee or the most coins alone. Look at the entire package. Consider security, regulation, fees, supported assets, staking terms, trading tools, and usability together.Crypto investing already involves substantial market risk. Your exchange should make managing that risk easier, not harder. Use reliable market information and comparison resources, including the tools available through StockPrices.com, to stay informed before making decisions.Ready to choose? Compare your priorities, shortlist two or three platforms, read their current fee and staking terms, and only then decide where your crypto journey should begin.Frequently Asked QuestionsIs It Safe to Keep Cryptocurrency on An Exchange?Keeping cryptocurrency on an exchange carries platform and cybersecurity risks, even when the provider has strong security measures. Investors should review custody policies, account protection, withdrawal controls, regulatory status, and security practices. For larger holdings, understanding the differences between exchange custody and self-custody can be especially important before committing funds.Can I Use More Than One Crypto Exchange?Yes. Using multiple exchanges can provide access to different cryptocurrencies, fee structures, trading tools, or regional services. However, managing several accounts can make portfolio tracking, security, tax records, and transaction history more complicated. If you use multiple platforms, maintain strong passwords, enable multifactor authentication, and keep accurate records.What Should I Check Before Opening a Crypto Exchange Account?Check the platform's availability in your location, supported cryptocurrencies, trading and withdrawal fees, security features, custody arrangements, regulatory information, staking terms, and customer support options. Also review minimum transaction requirements and transfer restrictions. Reading the current terms before depositing money can help prevent unexpected costs or limitations later.Do Crypto Exchanges Charge Withdrawal Fees?Many exchanges charge network or withdrawal-related fees, although the amount and structure differ by asset and platform. Some fees can also change with network conditions. Before transferring cryptocurrency, check the exchange's current withdrawal page and preview the transaction. Never assume that low trading fees mean withdrawals are free.Are Crypto Exchange Ratings Enough to Choose A Platform?No. A rating is useful as a starting point, but it should not be the only deciding factor. Two platforms with similar ratings may serve very different investors. Compare the criteria behind the rating, including fees, asset selection, security, usability, staking, customer support, and regulatory considerations, before choosing.
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