A Word of Caution About Bond ETFs

Marvin Appel

Exchange-traded funds (ETFs) are a special type of mutual fund whose shares trade like stocks throughout the day. In contrast, conventional open-end mutual fund shares trade only once at the end of each day. ETF shareholders trade with each other at the prevailing market price, whereas open-end mutual fund shareholders purchase or redeem shares from the mutual fund company, all at the same daily price.

At first glance, ETFs would seem ideally suited for bond investors because they have lower expense ratios than almost all mutual funds, which leaves more interest income available to pay to shareholders. Bond ETFs now offer investors exposure to many different areas of the bond market, including Treasuries, ...