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.
In this guide, we review the Best UK Bond ETF for UK Investors. We also discuss the best UK brokers to buy bond ETFs and how to get started with an investment account today!
Best Bond ETF UK 2021 List
Here’s a snap-shot list of the best UK bond ETF for UK investors to consider in 2021. You can read our full analysis of each bond ETF by scrolling down.
- Vanguard Total Bond Market ETF – Overall Best UK Bond ETF UK – Invest Now
- iShares Corp Bond UCITS ETF – Best UK Bond ETF UK to Invest in Corporate Bonds – Invest Now
- SPDR Bloomberg Barclays High Yield Bond ETF – Best ETF for High-Yield Returns – Invest Now
- PIMCO Active Bond Exchange-Traded Fund ETF – Best UK Bond ETF UK to for Global Diversification
- iShares TIPS Bond ETF – Best UK Bond ETF UK to Protect Against Inflation
Best Bond ETFs UK Reviewed
In choosing the best UK bond ETF UK for your needs, you also need to look at the metrics surrounding past performance, fees, and minimum account balances.
To help point you in the right direction – below we review five of the best UK bond ETF UK investments for 2021.
1. Vanguard Total Bond Market ETF – Overall Best UK Bond ETF UK
If you are looking to enter the bond investment space in a super-diversified manner – look no further than the Vanguard Total Bond Market ETF. Put simply, this Vanguard 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.
Your capital is at risk.
2. iShares Corp Bond UCITS ETF – Best UK Bond ETF UK to Invest in Corporate Bonds
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.
In terms of past performance, this best UK corporate bond ETF has generated averaged annualized gains of 4.89% since it was incepted in 2003. On top of steady NAV gains, you will also be entitled to regular coupon bond payments. The expense ratio on this best UK corporate bond ETF – which refers to the amount you pay each year – stands at just 0.20%. This amounts to £4 for every £2,000 invested.
Your capital is at risk.
3. SPDR Bloomberg Barclays High Yield Bond ETF – Best UK Bond ETF UK to for High-Yield Returns
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 good 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 best 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%. As such, you’ll pay £8 per year on a £2,000 investment.
Your capital is at risk.
4. PIMCO Active Bond Exchange-Traded Fund ETF – Best UK Bond ETF UK to for Global Diversification
While many bond ETFs focus on a specific market – some of you might want to gain exposure to several international economies. If this is the case, it might be worth considering the PIMCO Active Bond Exchange-Traded Fund ETF. Launched way back in 1971, this bond ETF has an excellent 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 good 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.
This is remarkable when you consider that the ETF has been active for four decades. In more return 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.
Your capital is at risk.
5. iShares TIPS Bond ETF – Best UK Bond ETF UK to Protect Against Inflation
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.
With this in mind, one of the best UK bond ETFs for inflation protection purposes is that of the iShares TIPS Bond ETF. As the name implies, this ETF focuses on TIPs – which are Treasury inflation-protected securities. In simpler terms, TIPs are designed to increase in value at the same rate as inflation levels.
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.
Your capital is at risk.
List of Bond ETFs UK to Consider
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.
Are UK Bond ETFs a Good Investment?
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.
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
Make no mistake about – opting for an ETF over individual bonds is significantly cheaper. For example, when you use Hargreaves Lansdown – which is one of the very few UK stock brokers that allows you to buy bonds, you will need to pay a dealing commission.
Most bonds need to be purchased over the phone – so Hargreaves will charge you a 1% fee (£20 minimum, £50 maximum). However, when you invest in the best UK bond ETFs, you will 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.
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.
This is in stark contrast to how the best UK bond ETFs work. Crucially, bond ETFs are listed on public exchanges just like stocks. This means that you can enter and exit your bond ETF anytime during standard market hours.
What are the Drawbacks of UK Bond ETFs?
Although the best 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.
Perhaps, this is also a benefit – especially if you are looking for a passive investment stream. However, if you do have an appetite for a specific bond market that isn’t available through an ETF – you will need to invest on a DIY basis.
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. This is why you might want to consider a bond ETF alongside a fund that gives you access to the stock markets. In doing so, not only can you target large financial returns – but you will be diversified across two key asset classes.
Best UK Bond ETF UK Investment Platforms 2021
So now that we have considered the benefits and potential drawbacks of investing in a bond ETF – we are now going to discuss the best brokers to complete your investment with.
1. eToro – Invest in Bond ETFs with 0% Commission
If you’re looking to buy the best UK bond ETFs in a safe, low-cost, and simple manner – eToro covers all bases. This user-friendly online brokerage site now boasts a customer base of over 20 million investors. The main attraction with eToro is not only that the broker is easy to use – but it allows you to invest on a commission-free basis.
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 of the best 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.
An additional benefit of choosing eToro is that you can 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).
- Super user-friendly online trading platform
- Buy stocks without paying any commission or share dealing charges
- Trade CFDs in the form of stocks, indices, commodities, forex, and more
- 2,400+ stocks listed on the UK and international markets
- Deposit funds with a debit/credit card, e-wallet, or UK bank account
- Ability to copy the trades of other users
- FCA and FSCS protections
- Not suitable for advanced traders that like to perform technical analysis
67% of retail investors lose money trading CFDs at this site
2. Libertex – Trade Bond ETFs with ZERO Spread and Leverage
If you are looking to take a short-term approach to the best UK bond ETF for UK investors, it might be worth considering a CFD trading platform like Libertex. The broker – which was launched over two decades ago, allows you to trade bond ETFs without taking ownership of the instruments.
Instead, you will be tasked with speculating on whether you think the bond ETF will rise or fall in value. When trading bond ETF at Libertex via CFD derivatives, you will benefit from a ZERO spread service. This means that the bid and ask price of the ETF is like-for-like, resulting in a super-low trading fee.
When it comes to dealing commissions – Libertex is also very competitive. For example, the iShares Core U.S. Aggregate Bond ETF can be traded at a commission of just 0.1% per slide. There are two more core benefits of trading bond ETFs at Libertex. Firstly, you can trade with Leverage – meaning you can boost the size of your available capital.
In the case of bond ETFs, this stands at a maximum of 1:5. As such, a £200 balance would allow you to trade with £1,000. Other assets come with even higher leverage limits. For example, Libertex offers 1:30n on major currency pairs and 1:20 on gold. Secondly, Libertex allows you to short-sell bond ETFs. This means you can profit in the event the asset declines in value.
If you like the sound of trading bond ETFs at Libertex but have little to no experience in this space – you might want to consider starting with the free demo account facility. Or, if you want to start trading with real money straight away, the minimum deposit is just £100. This broker supports a variety of payment methods – including debit/credit cards, e-wallets, and a bank transfer.
- Zero spread CFD trading
- Very competitive commissions
- Good educational resources
- Long established broker
- Trade stocks and indices like the Dow Jones
- Compatible with MT4
- Great choice of markets
- Only offers CFDs
83% of retail investors lose money trading CFDs at this site.
How to Buy the Best UK bond ETFs
Ready to start injecting money into the best UK bond ETF for UK investors? If so, we are going to walk you through the investment process with commission-free broker eToro.
Step 1: Open an Account and Upload ID
You will first need to open an account with eToro – either through the provider’s website or via its iOS/Android investment app. You will then need to provide some personal information – such as your name, home address, date of birth, mobile number, and National Insurance Number.
Next, you will need to upload a copy of your passport or driver’s license, alongside a recently-issued bank account statement or utility bill. This is to ensure eToro complies with KYC (Know Your Customer) regulations – as per the FCA.
You can, however, verify your account at a later date – as long as you are not intending on investing more than $2,250 (about £1,600 GBP).
Step 2: Make a Deposit
Once you have registered, eToro will allow you to make a deposit. You can do this instantly by using your UK debit/credit card. E-wallets like Paypal and Skrill are also supported.
Step 3: Search for a Bond ETF
If you have decided which bond ETF you wish to invest in – search for it. In the example below, we are looking to invest in the Vanguard Total Bond Market ETF.
You can also browse which of the best UK bond ETF for UK investors are supported by clicking on the ‘Trade Markets’ button – followed by ‘ETFs’.
Step 4: Invest in a Bond ETF
Finally, you need to place a trade to complete your bond ETF investment. To do this, simply enter your stake in the ‘Amount’ box – in US dollars. In our example, we are investing $100 into the Vanguard Total Bond Market ETF, albeit, the minimum on eToro is just $50.
Once you click on the ‘Open Trade’ button – your bond ETF investment will be added to your eToro portfolio.
In conclusion, bond ETFs are a great 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. Plus, the best UK bond ETFs come with a very low expense ratio that is usually sub-0.50%.
All you need to do now is find a suitable UK broker that gives you access to your chosen bond ETF. We found that FCA-regulated eToro platform is the best broker for the job – as it allows you to invest in bonds and stocks on a commission-free basis. The minimum investment is just $50 and getting started with an account takes less than 10 minutes!
eToro – Buy the Best UK Bond ETFs with 0% Commission
67% of retail investor accounts lose money when trading CFDs with this provider.
What is the best UK corporate bond ETF?
We found that the best UK corporate bond ETF for 2021 is the iShares Corp Bond UCITS ETF. This popular ETF gives you access to over 2,300 corporate bonds from a wide range of sectors and industries.
How do you make money from a bond ETF?
The best bond ETFs allow you to make money in two different ways. Firstly, you will be entitled to your share coupon payments - which is usually distributed by the bond ETF on a monthly or quarterly basis. Secondly, when the ETF provider sells bonds before they mature at a profit - you will be entitled to your share. This is represented in the NAV of the fund. When the NAV rises, so will the value of the ETF.
How do you sell a bond ETF?
Bond ETFs trade on public stock exchanges just like shares. As such, you can sell your bond ETF investment at any time through your chosen online broker.
How much do bond ETFs cost in the UK?
Bond ETFs in the UK charge an annual fee known as the 'expense ratio'. In most cases, this is less than 0.5% per year. The amount you pay will depend on the size of your investment into the bond ETF..
What are the interest rates on investment grade bonds?
Yields on investment grade bonds will vary wildly depending on a number of different factors. This includes the financial strength of the issuer, the duration of the bonds, and how much capital is being borrowed.