Those who invest in bond ETFs often look at the costs first. But the key risk indicator is different: duration.
• Duration shows how strongly a bond ETF reacts to changes in interest rates
• High duration means high fluctuations: Long-term investors benefit when interest rates fall, but lose heavily when interest rates rise
• Crucial for investors: Always evaluate duration in the context of the interest rate outlook, investment horizon and risk
What duration means and why it matters
Bonds and interest rates behave like two sides of a scale: If interest rates rise, the prices of existing bonds fall because newly issued securities offer higher returns. Duration measures how strongly a bond portfolio reacts to such interest rate changes. In practice, the so-called modified duration is usually used: It indicates by what percentage the price of a fund falls or rises if market interest rates rise or fall by one percentage point. A fund with a duration of ten years loses around ten percent of its value if interest rates rise by one percentage point. Conversely, he gains the same amount if interest rates fall. BlackRock describes this in its introduction to duration: A fund with a duration of ten years is twice as volatile as a comparable fund with a duration of five years.
The duration is not identical to the term of a bond. It also takes into account the interim interest payments. The lower the coupon of a bond, the longer its duration because a larger portion of the return occurs at the end of the term. Zero coupon bonds, which make no ongoing payments at all, have a duration that corresponds exactly to their term.
Cross-country skiers: great potential, great risk
Anyone who specifically relies on long-term government bonds is making a particularly significant interest rate bet. The iShares € Govt Bond 15-30yr UCITS ETF, a product from BlackRock that bundles government bonds from France, Germany, Italy, the Netherlands and Spain with maturities between 15 and 30 years, has an effective duration of almost 16 years, according to the current fact sheet. [*zeitgebundene Angabe aus Fondsunterlagen, Stand März/April 2026] The effective duration is a further development of the modified duration and also takes into account possible changes in payment flows, for example through embedded options. For simple government bonds without such special features, both key figures provide almost identical values. This means: If interest rates rise by one percentage point at the long end, the fund loses around 16 percent of its value in approximate terms. A look at the historical annual performance of the ETF shows that price drops of more than 30 percent actually occurred in years with sharply rising interest rates. The upward movements in years of falling interest rates, in which the fund was able to record double-digit price gains, are just as impressive.
Such fluctuations are not a coincidence, but a direct consequence of the concept. Anyone who holds bonds with a very long remaining term is tied to a certain interest rate level. The longer this bond lasts, the more the price reacts to changes in the market. This applies to individual securities as well as to ETFs that bundle such securities.
Duration compared to other risk metrics
The expense ratio often dominates the public discussion about ETFs. The total expense ratio (TER) of the iShares fund described is 0.15 percent per year, which is low compared to actively managed funds. But even if you extrapolate the costs over many years, they remain far behind the influence of duration. A one percentage point increase in interest rates can reduce the price of a long-term ETF by several times the annual costs.
The concept of convexity adds another dimension to duration: Duration assumes a linear relationship between interest rate movements and price changes. In reality, however, when interest rates rise, prices fall somewhat less than the duration suggests, while when interest rates fall they rise somewhat more. For investors, this means that long-term investors potentially gain a little more when interest rates fall than the pure duration calculation suggests.
What investors should consider when buying bond ETFs
The duration of a bond ETF can usually be found directly in the provider’s fact sheet. When comparing different products, it therefore makes sense not only to look at returns and costs, but also to note the effective duration specified. An ETF on short-term government bonds with a duration of two to three years is significantly less sensitive to interest rate movements than a long-term ETF.
At the same time, duration is not just a risk characteristic. In an environment of falling interest rates, funds with a high duration benefit disproportionately. This makes them interesting for investors who are betting on falling interest rates or who want to protect their portfolio against such a scenario. The risk is that the direction of interest rates is difficult to predict. Investors who invest in long-term securities are therefore making a conscious bet on the development of interest rates. It is therefore advisable to always evaluate the duration of a bond ETF in connection with your own investment horizon and personal risk tolerance.
Jonas Vogt, editorial team at finanzen.net
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