Best Bond ETFs UK for 2024
Whenever the topic of investing is raised, the topic of bonds is usually not far behind. After all, bonds are an entire asset class of their own. Opinions on whether bonds belong in an investment portfolio or not tend to be divided, as for or against their inclusion, investors tend to have different beliefs about the utility of bonds.
This article is here to serve as a short introduction to what exactly this financial product is and what the advantages and disadvantages of investing in it are. A list of some of the best bond ETFs UK to watch for this year is also provided, which can serve as a good starting point to build your research.
Table of Contents
What are Bond ETFs?
There are two components to analyse here: ‘bond’ and ‘ETF’.
What are Bonds?
A bond is a certificate of an outstanding loan from an investor (the lender) to a company or government (the borrower). The borrower pays an interest rate to the lender. A bond's value might go up or down depending on the level of demand. A bond also has a duration to maturity, which is the remaining amount of time left until the debt must be repaid.
What are ETFs?
‘ETF’ stands for ‘exchange traded fund’. An ETF is a financial instrument that aims to track the price of an underlying index. This can be a single asset like gold or oil, but most ETFs aim to track the price of a bundle of underlying assets, such as a basket of stocks. ETFs offer investors the opportunity to build a diversified portfolio by investing in one single asset.
What are bond ETFs?
Bond ETFs then, are a type of ETF that exclusively aims to track an index composed of bonds. There are many types of different bond ETFs; some of them might track bonds from a specific organisation or institution, like a country’s government, a corporation, or even a municipality. Many bond ETFs are a blend of bonds issued by different sources. Bonds in ETFs are rarely held to maturity, as the ETF issuer buys and trades the bonds underlying the ETF.
Best Bond ETFs UK to Watch
Now that we know what a bond ETF is, let’s look at some of the best bond ETFs UK that are worth keeping an eye on. What constitutes the ‘best’ bond ETF differs from investor to investor. Everyone who is looking to invest in the financial markets should always do their own due diligence and perform their own research before making an investment decision.
Here are the top five bond ETFs UK to watch this year:
- iShares USD High Yield Corp Bond ETF (IHYU) – A bond ETF with high-yield corporate bonds
- iShares US Aggregate Bond ETF (IUAG) – A bond ETF tracking the total US investment-grade bond market
- iShares USD Corp Bond ETF (LQDA) – A bond ETF with high credit score corporate bonds
- iShares J.P. Morgan USD EM Bond ETF (IEMB) – A bond ETF with emerging market bonds
- iShares JP Morgan EM Local Government Bond ETF (IEML) – A bond ETF with emerging market bonds issued in the local currencies
iShares USD High Yield Corp Bond ETF
iShares USD High Yield Corp Bond ETF strives to track the performance of an index that consists of U.S. dollar-denominated high-yield corporate bonds. The term ‘high yield’ means that these bonds pay higher coupon payments, which is the interest payout the bond issuer pays to the bondholder. This type of bond is usually considered riskier than investment-grade bonds.
The main exposure of the ETF is to cyclical consumer goods (~19%). Furthermore, there is exposure to the sectors of communication (~14%), non-cyclical consumer goods (~13%), energy (~13%), and capital goods (~12%). Most of the bonds (31.01%) in the ETF have a duration between 3 and 5 years.
The top ten biggest bond issuers in the ETF by the size of capital allocation are in order: Onemain Finance, Teva Pharmaceuticals Finance, United Rentals, Transdigm, Tenet Healthcare, Ford Motors, Ball Corporation, Icahn, Dish DBS, Goodyear Tire & Rubber. Onemain Finance represents ~3% of the fund’s assets, and Goodyear Tire & Rubber ~2%.
This ETF trades under the ticker symbol ‘IHYU’ on the Italian, Swiss, London, and Mexican stock exchanges. On the German stock exchange, the ticker symbol is ‘ISOR’.
iShares US Aggregate Bond ETF
The iShares Core U.S. Aggregate Bond ETF seeks to track the investment results of an index composed of the total U.S. investment-grade bond market. Investment grade bonds are bonds that have a high-quality rating. These are usually bonds from companies that have a high credit rating.
The bond sectors represented in this fund are Treasury (~42%), MBS Pass-Through (~26%), Industrial (~14%) and Financial Institutions (~8%), with the rest of the fund’s capital divided into smaller pieces over several other sectors.
The top ten biggest bond issuers in this ETF by the size of capital allocation are in order: the United States Treasury, the Federal National Mortgage Association, the Government National Mortgage Association, the Federal Home Loan Mortgage Corporation, Uniform MBS, Bank of America Corporation, JPMorgan Chase & CO, Morgan Stanley, the Federal Home Loan Mortgage Corporation, Citigroup INC, and Goldman Sachs.
The United States Treasury represents ~42% of the fund’s capital, and Goldman Sachs ~0.3% The fund trades under the ticker symbol ‘IUAG’ on the Mexican, London, and Swiss stock exchanges. The ticker symbol on the German stock exchange is ‘EUNX’.
iShares USD Corp Bond ETF
The iShares USD Corp Bond ETF aims to track the performance of an index composed of corporate bonds. However, this fund holds investment-grade bonds instead of high-yield bonds. Historically, investment-grade bonds offer lower risk but also a lower potential reward. Another key difference is the duration of the bonds that are included in the ETF. Whereas the iShares USD High Yield Corp Bond ETF mainly holds bonds with a maturity duration of 3–5 years, the iShares USD Corp Bond ETF mostly consists of bonds with a 20-year duration to maturity.
The bonds in this ETF belong to the banking sector (~23%), then non-cyclical consumer goods (~18%), communication (~12%), and technology (~12%). The rest of the fund’s capital is spread in smaller chunks over an assortment of other sectors.
The top 10 bond issuers in this ETF by size of capital allocation are in order: JPMorgan Chase, Bank of America, Morgan Stanley, Goldman Sachs, Citigroup, Verizon, Wells Fargo, AT&T, Comcast, and Oracle.
JPMorgan Chase represents roughly 3% of the fund’s capital, and Oracle roughly 1.7%. The fund trades under the ticker symbol ‘LQDA’ on the Colombian, Mexican, London, and Swiss stock exchanges.
iShares J.P. Morgan USD EM Bond ETF
The iShares J.P. Morgan USD EM Bond ETF seeks to track the results of an index composed of emerging market bonds. An emerging market is a market that shows characteristics of a developed market but doesn’t yet meet the criteria for a fully developed market.
The iShares J.P. Morgan USD EM Bond ETF is composed of government bonds of countries that fall under the category of emerging markets. These are countries that are expected to experience growth in the future. Bonds issued by developing countries sometimes have higher coupon rates than those issued by developed countries because the market judges these issuers to have a higher risk of default. Ergo, the bond issuer pays a higher rate to make buying their bond more attractive.
The top ten bond issuers included in this ETF by size are, in order: Turkey, Saudi Arabia, Brazil, the Philippines, the Dominican Republic, Mexico, Qatar, Colombia, Indonesia, and Oman. Turkey represents ~4.5% of the fund’s capital allocation, and Oman roughly 3%. The vast majority (85%) of these bonds are government bonds. The other 15% are agency bonds, which are bonds issued by a government-backed agency.
The fund trades under the ticker symbol ‘EMB’ on the Mexican and Santiago stock exchanges, as well as the NASDAQ exchange.
iShares JP Morgan EM Local Government Bond ETF
The iShares JP Morgan EM Local Government Bond ETF also contains bonds from countries that fall under the category of emerging markets. The main difference lies in the currency in which the value is denominated. Whereas in the previous fund, all bonds were denominated in USD, the iShares JP Morgan EM Local Government Bond ETF measures the value of the bond in the local currency of the respective country.
Another difference between the JP Morgan Emerging Markets ETF and this fund is which emerging-market countries are included. Whereas the iShares JP Morgan EM ETF holds mainly bonds from Arabic and Latin-American countries, the iShares JP Morgan EM Local Government Bond ETF offers exposure to Asian countries such as Thailand, China, and Malaysia.
The top ten bond issuers in this ETF by size of capital allocation are, in order: Malaysia, Mexico, Thailand, China, Indonesia, Brazil, South Africa, Poland, the Czech Republic, and Colombia. Bonds issued by Malaysia account for ~10% of the fund’s capital allocation, and bonds issued by Colombia are roughly 5%. More than 99% of the bonds in this ETF are issued by the ministries of finance of the respective countries.
The fund trades under the ticker symbol ‘IEML’ on the Mexican, London, and Swiss stock exchanges. It trades under the ticker symbol ‘SEML’ on the Italian and London stock exchanges. It is listed on the German stock exchange under ‘IUSP’.
How to Invest in Bond Funds UK
With Admiral Markets, you can invest in global stocks and ETFs with the following commissions:
- UK stocks – 0.1% of trade value, 1 GBP minimum commission.
- US stocks – From $0.02 per share, 1 USD minimum commission.
- Germany and France stocks - 0.1% of trade value, 1 EUR minimum commission.
You can learn more about investing commissions on the Admiral Markets Contract Specification page. You can search for global stocks from the Invest.MT5 web platform and invest in four steps:
- Open an account with Admiral Markets.
- Click on Trade on one of your live or demo trading accounts to open the web platform.
- Search for your symbol at the top of the search window.
- Click Create New Order in the bottom window to open a trading ticket to input your trade size, stop loss and take profit level.
Why Invest in Bond ETFs UK?
Bond ETFs offer investors the possibility of investing in bonds without having to purchase them individually. This can save investors a lot of hassle, as they do not need to deal with buying bonds from a number of separate countries and institutions. As ETFs are traded on exchanges like stocks, they are also far more liquid than the market for individual bonds.
Bond ETFs also come with a few disadvantages. First, bonds are inclined to decline in value when interest rates change. Historically, if there is a rise in interest rates, bond prices fall. Furthermore, if the issuer of the bond is in trouble financially, the prices of their bonds are likely to decline in value as the issuer is seen as unlikely to be able to repay their debt. Lastly, a bond ETF gives an investor little to no control over the specific types of bonds they invest in.
FAQs on Best Bond ETFs
Is a bond ETF worth it?
Whether a bond ETF is a worthwhile investment depends on your own investment goals, strategy, and horizon. It is important to do extensive research before making any investment decisions. Bonds are historically less volatile than stocks in low-interest rate environments, leading many investors to allocate a portion of their portfolio to bonds as a sort of dampener for when markets inevitably start to tumble. However, when interest rates are on the rise or remain high for a longer period of time, bond ETFs can in fact see declines in value. As always, investors should perform their due diligence and know what they’re investing in as they start building their portfolios.
What are the safest investment bonds in the UK?
A ‘safe’ bond is usually one that has been given a high credit score by a trusted rating agency. However, while bonds have historically been less volatile than stocks, there is no such thing as a risk-free investment. Investors looking to minimize their risk would do well to research which governments or institutions the market trusts to have a low risk of default. The term ‘investment grade’ is sometimes used to label these bonds, though again, that does not mean risk-free.
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