can bond etfs lose money

Bond ETFs, while typically less risky than individual bonds, can still lose money due to interest rate risk, credit risk, market risk, expense ratios, and tracking error.

Oct 14, 2024 at 10:47 pm

Can Bond ETFs Lose Money?

Yes, bond exchange-traded funds (ETFs) can lose money, although they are generally considered less risky than individual bonds. Here are the reasons why bond ETFs can lose value:

1. Interest Rate Risk

When interest rates rise, bond prices typically fall. This is because investors can buy newer bonds with higher interest rates, making existing bonds with lower interest rates less attractive. Bond ETFs are affected by this risk if they invest in bonds that mature long in the future (have a longer duration).

2. Credit Risk

Bond ETFs that invest in corporate bonds or high-yield bonds are subject to credit risk, meaning the issuer of the bond may default on their obligations. If a bond issuer defaults, bondholders may not receive all or any of the money they invested.

3. Market Risk

Bond ETFs are subject to general market risks, such as economic downturns or geopolitical events, which can affect investor sentiment and cause bond prices to decline.

4. Expense Ratios

Bond ETFs typically have expense ratios, which are annual fees charged to cover the fund's management and operating costs. These expenses can reduce the fund's returns over time.

5. Tracking Error

Bond ETFs are designed to track a specific bond index, such as the Bloomberg Barclays U.S. Aggregate Bond Index. However, they may not always track the index perfectly due to factors such as liquidity constraints or trading costs. This can result in the bond ETF performing differently from its benchmark and potentially losing money.

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