Bond ETF: The main differences
Bond ETFs are perfect for increasing portfolio security. But there are differences between the individual bond ETFs: Depending on the provider and the replication method, the development of the underlying index is more or less exactly replicated. Ultimately, this determines the return you can achieve as an investor. Your return is also influenced by the total expense ratio, which also differs from one provider to another – you must consider the following criteria when choosing a bond ETF:
The replication method: ETFs track an index in two different ways: directly or indirectly. Physically replicating ETFs (direct replication) buy and sell the original shares of the underlying index. A direct replication bond ETF actually buys and sells the securities in the underlying index. With full replication, the ETF provider even owns the shares all title in physical form. Synthetically replicating ETFs (indirect replication) on the other hand, they do not buy and sell the stocks included in the index. If you want to find out more about the advantages and disadvantages of the various replication methods, we recommend the buying ETF and ETF savings plan guides.
The distribution type: With a bond ETF, you participate in price gains and dividends from the bonds contained in the index fund. Now all you have to do is decide what to do with your earnings. If you want to be credited with the dividends, then you need to choose a paying ETF. You can then alternatively invest the income from your ETF or use it for consumer spending. ETFs that reinvest all dividends are called accumulation ETFs. You benefit from a kind of compound interest effect, since the value of the ETF not only increases through price gains, but also through the income generated.
Tip: Accumulating ETFs can fully exploit their strengths in connection with an ETF savings plan. In our large ETF comparison, we present the best ETFs that are suitable for savings plans for long-term wealth accumulation.
The tracking error: This describes the difference between the performance of the ETF and the price development of the underlying index. The tracking error thus measures the deviation of the fund performance from the index performance. The greater the deviation between the ETF and the index, the greater the costs incurred. The tracking error is therefore one of the most important quality features of ETFs.
The investment costs: More than almost any other factor, the costs are decisive for the success of an investment. The good thing: You can easily influence the costs. If you want to read more about the investment costs of an ETF, we recommend our guide to the MSCI World ETF. There we deal in detail with the investment costs of an ETF.
Tip: Incidentally, you can find the most important terms relating to ETFs in our ETF lexicon – and they are explained in great detail.