Best Bond ETFs UK to Watch
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Buying bonds in the UK is somewhat difficult as a retail client. This is because bond issuers typically require a large minimum investment – meaning that this financial instrument is often out of reach for the Average Joe.
Fortunately, ETFs remove these barriers – as through a single trade you can often invest in hundreds of different bonds. Not only does this include corporate bonds in the UK and overseas – but government-backed instruments, too.
Bond ETF UK 2022 List
Here’s a snap-shot list of some UK bond ETFs for UK investors to research in 2022 based on trading volumes. You can read our full analysis of each bond ETF by scrolling down.
- Vanguard Total Bond Market ETF
- iShares Corp Bond UCITS ETF
- SPDR Bloomberg Barclays High Yield Bond ETF
- PIMCO Active Bond Exchange-Traded Fund ETF
- iShares TIPS Bond ETF
Bond ETFs UK Reviewed
In choosing UK bond ETF UK for your needs, you also need to look at the metrics surrounding past performance, fees, and minimum account balances.
1. Vanguard Total Bond Market ETF
The Vanguard Total Bond Market ETF gives you access to more than 10,000 individual bond instruments from a broad scope of sectors.
For example, the ETF holds just over 42% in US government bonds – which are as close as risk-free that you will get in the investment space. To ensure the ETF is able to generate attractive returns, it also holds bonds from the corporate space. In terms of the risk involved, 67% of the bonds held in this ETF carry a credit rating of AAA.
This is the highest rating that bonds can achieve – meaning they issued by rock-solid institutions. At the other end of the scale, there are 12% and 17% held in A and BBB bonds, which come with a higher risk/reward ratio. In terms of performance, this bond ETF has generated steady returns over the past decade.
In fact, based on a 10-year period, the ETF has returned average annual gains of 3.51%. In addition to this, you will, of course, be entitled to your share of any bond coupon payments that the ETF receives. Unlike other options in this space, the Vanguard Total Bond Market ETF makes a dividend distribution every month.
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2. iShares Corp Bond UCITS ETF
While the aforementioned Vanguard fund has a heavy focus on US government bonds, the iShares Corp Bond UCITS ETF concentrates exclusively on corporate bonds. This gives you the opportunity to target slightly higher returns, as the yields on corporate bonds are typically much higher than their governmental counterparts.
In total, this iShares ETF will give you access to over 2,300 individual bonds from a variety of sectors. Each and every corporate bond in the ETF has been issued by a US-listed company. This includes the likes of Goldman Sachs, Boeing, Microsoft, CVS Health, and AT&T.
Although corporate bonds come with more risk, this ETF is really well diversified. Not only in terms of the number of bonds held by iShares but the fact the largest weighting in the ETF is just 0.39%. This ensures that you are not over-exposed to a single bond instrument – should the issuer run into financial problems.
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3. SPDR Bloomberg Barclays High Yield Bond ETF
If you are the type of investor that has a slightly higher tolerance for risk – then you might want to consider the SPDR Bloomberg Barclays High Yield Bond ETF. As the name suggests, this bond ETF focuses on instruments that attract a higher yield. In turn, this will allow you to target higher financial returns.
It total, this ETF holds just over 1,200 individual bonds. Much like the previously discussed iShares fund, this ETF focuses only on corporate-issued instruments. This covers a variety of sectors – including the likes of energy, telecommunications, capital goods, and technology.
Although these bonds attract a higher yield, the largest holding in the ETF is weighted at just 1.06%. After that, the next largest weight is just 0.54% – so you are well diversified. Some of the bonds that you will be buying include Carnival Crop, American Airlines, Caesars Entertainment, Ford Motors, Tenet Healthcare, and Vodafone.
Taking a closer look at the portfolio, the bonds held within the SPDR Bloomberg Barclays High Yield Bond ETF carry an average coupon yield of 5.92%. However, many of these bonds are now trading at a premium, so the running yield is slightly lower at 5.70%.
Look at the fund’s past performance, this high yield ETF has generated an average annualized return of 5.53% since it was launched in 2007. Over a 5-year period, the average annual gains stand at a more attractive 7.70%. Finally, this bond ETF carries an expense ratio of 0.40%.
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4. PIMCO Active Bond Exchange-Traded Fund ETF
While many bond ETFs focus on a specific market – some of you might want to gain exposure to several international economies. The PIMCO Active Bond Exchange-Traded Fund ETF offers this. Launched way back in 1971, this bond ETF has a strong track record.
It gives you access to a number of bond markets account the world – which includes Canada, Japan, Brazil, Mexico, Germany, France, and the UK. With that said, there is a heavy focus on bonds issued in the US – which accounts for over 90% of the portfolio.
Nevertheless, this ETF holds bonds from both the government and corporate spaces – so there is a blend of risk and reward. Talking of risk, more than 40% of the ETF portfolio is held in US Treasuries. There is then a mix of credit ratings – ranging from AAA down to a small allocation of D’s.
As you will be gaining access to several bond marketplaces, the expense ratio on this ETF is slightly more expensive at 0.57%. With that said, this still amounts to just £11.40 per £2,000 invested. In terms of performance, this bond ETF has generated NAV returns (after fees) of 4.49% since its inception.
In more recent times, the ETF has an average annualized return of 4.43% over a 5-year period. Finally, at the time of writing, the PIMCO Active Bond Exchange-Traded Fund ETF is offering a running distribution yield of 2.71% – which refers to your dividend payments.
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5. iShares TIPS Bond ETF
While many of you will be looking to invest in a bond ETF as part of a long-term investment plan, others will simply be looking to protect their wealth against the threat of inflation. After all, if you are not growing your money at a rate that at least mirrors inflation – your purchasing power will continue to decrease.
In other words, if inflation levels rise by 2% – as will the yield on your TIPs. Accessing TIPs as a retail client can be difficult – which is why this iShares ETF fits the bill. In total, the iShares TIPS Bond ETF holds 51 instruments with various maturity dates. This ranges from short-term T-Bills that mature in less than 1-year to US Treasuries with a maturity of over 20 years.
The expense ratio on this bond ETF is a very reasonable 0.19% per year. In terms of performance, the iShares TIPS Bond ETF has grown by an average of 4.35% since it was incepted in 2003. In comparison – the Bloomberg Barclays U.S. Treasury Inflation-Protected Securities (TIPS) Index – has grown by 4.50%. As such, this iShares ETF has served its purpose well for 18 years.
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List of Other Popular Bond ETFs UK
There are hundreds of bond ETFs available to UK investors – so naturally, there might be a financial instrument you are considering that we haven’t discussed today.
If you are looking for a bit more choice – check out the list of alternative bond ETFs UK below.
- UltraPro Short 20+ Year Treasury
- SPDR® Bloomberg Barclays UK Gilt UCITS (Sterling)
- ProShares Short 7-10 Year Treasury
- Sound Enhanced Fixed Income ETF
- iShares iBonds 2023 Term High Yield and Income ETF
- Bloomberg Barclays MSCI US Corporate 0-3 Sustainable SRI
As always, make sure you perform lots of research before you invest in your chosen bond ETF.
Fundamentals of UK Bond ETFs
Bond ETFs offer an alternative to the stock markets. After all, you won’t be reliant on the growth of individual companies Instead, you will benefit from a steady flow of predictable income. This is because bond yields are fixed – so you’ll have a round-about idea of what sort of returns to expect.
If you’re still sitting on the fence as to whether or not bond ETFs are right for you – check out the benefits discussed below.
Access Difficult-to-Reach Bonds
As a UK retail client, your ability to buy bonds on an individual basis is going to be extremely limited. As we briefly covered earlier, this is because bonds are issued in minimum lot sizes – which is often out of reach for the everyday investor. Plus, when bonds are issued, they are typically sold directly to institutional investors and banks.
Even if you find a broker that gives you access to the secondary bond market – once again, the minimum investment required is often 5-figures.
This is where UK bond ETFs come in. As you will be investing your capital into a large-scale provider like Vanguard, iShares, or SPDR – you will be able to access any bond market of your choosing. Whether that’s corporate bonds, UK Gilts, US Treasuries, or high-risk emerging market bonds – there will be an ETF for you.
Diversification
Another major advantage of opting for a UK bond ETF – as opposed to buying individual instruments, is that you will benefit from instant diversification. That is to say – through a single investment, you might be purchasing an ETF basket that contains hundreds or even thousands of individual bonds.
For example, the Vanguard Total Bond Market ETF contains more than 10,000 bonds from both the corporate and governmental sectors. Crucially, by investing in such a large number of bonds – you are reducing the risks of being exposed to a potential default.
Fees are Low
Opting for an ETF is a fairly cheap option for buying bonds. Investors rarely pay more than 0.5% per year. In fact, many of the ETFs that we have discussed today charge less than 0.20%.
Not only this but every time your chosen ETF provider buys or sells bonds – this is taken care of behind the scenes. This means that you won’t need to pay a dealing commission on each subsequent trade.
Liquid Investment
Bonds are actually one of the most illiquid asset classes in the investment space. For those unaware, an illiquid investment is one that cannot easily be converted back to cash.
After all, when you buy a bond, you need to wait until it matures before you get your original investment back. Depending on which bonds you bought – this can be several years.
What are the Drawbacks of UK Bond ETFs?
Although UK bond ETFs serve many purposes – there are a number of drawbacks that also need to be considered.
No Control Over Investments
The main drawback with bond ETFs is that you will have no say in which financial instruments are bought or sold. Instead, the fund manager of your chosen ETF provider will make all decisions on your behalf.
Performance vs Stock Markets
There is no denying that in terms of financial gains – the stock markets have generated significantly larger returns than any bond ETF can provide. For example, even in a year dominated by the coronavirus pandemic, the S&P 500 index has grown by over 62% in the 12 months prior to writing this article.
Over the course of time, the same index has averaged annualized returns of over 10% – which dates back to 1926.
UK Bond ETF UK Investment Platforms
1. eToro
eToro is low-cost, easy to use and safe. This online brokerage site now boasts a customer base of over 20 million investors.
This means that you can enter and exit your chosen bond ETF market whenever you see fit and not be hit with dealing fees. There is no ongoing platform fee either – so it’s only the bond ETF expense ratio that you need to factor into your trading costs. In terms of what markets eToro supports, all UK bond ETFs discussed on this page are covered.
In addition to this, eToro offers over 2,400 commission-free stocks from 17 different exchanges. This covers the UK, US, Hong Kong, and many European markets – such as Germany, France, Sweden, and the Netherlands. This means that you can invest in a bond ETF alongside stocks and shares – subsequently giving you exposure to a broader segment of the financial markets. Further, eToro also allows you to buy cryptocurrencies and offers CFD trading markets on commodities, forex, and indices.
When it comes to the bond ETF investment process – this shouldn’t take you more than 10 minutes from start to finish. All you need to do is quickly open an account and make an instant deposit with your UK debit/credit card or an e-wallet like Paypal. Then, it’s just a case of deciding how much to invest in your chosen bond ETF. At eToro, the minimum investment per bond ETF is just $50 (about £35 GBP) – which is also the case with stocks.
eToro’s copy trading feature allows you to copy the portfolio of a seasoned investor like-for-like. There are thousands of verified traders to choose from and any buy or sell positions they make, will also be mirrored in your own eToro account. Finally, when it comes to the security of your bond funds – you should have no such worries. This is because eToro is regulated by the Financial Conduct Authority (FCA) and partnered with the Financial Services Compensation Scheme (FSCS).
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Conclusion
In conclusion, bond ETFs are a way to diversify your portfolio away from the stock markets. Not only will you be able to buy a large basket of bond instruments through a single trade – but you’ll be investing in an asset class with lower volatility levels than traditional shares.
FAQs
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Kane Pepi
