Bond ETFs vs. Bond Futures

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Written By
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Written By
Dan Buckley
Dan Buckley is an US-based trader, consultant, and part-time writer with a background in macroeconomics and mathematical finance. He trades and writes about a variety of asset classes, including equities, fixed income, commodities, currencies, and interest rates. As a writer, his goal is to explain trading and finance concepts in levels of detail that could appeal to a range of audiences, from novice traders to those with more experienced backgrounds.

Bond ETFs and bond futures offer different mechanisms for trading or investing in bonds and managing risk.

Understanding their distinct features, advantages, and disadvantages is important for traders looking to optimize their portfolio strategy.


Key Takeaways – Bond ETFs vs. Bond Futures

  • Liquidity and Trading Hours
    • Bond ETFs offer intraday liquidity similar to stocks.
    • Makes them accessible to a wide range of traders.
    • Bond futures provide high liquidity but are traded within specified exchange hours.
  • Operational Differences
    • ETFs hold actual bonds and reflect the underlying bond market’s performance.
    • Futures are contracts betting on future bond price movements.
      • Offers leverage and hedging opportunities.
  • Cost and Accessibilit
    • ETFs are easy to access for individual traders/investors with lower minimum investment requirements.
    • Futures require a higher understanding of the market and often have higher entry costs due to margin requirements.


Bond ETFs – Characteristics & Advantages

Bond ETFs are investment funds that track bond indices and trade on stock exchanges, similar to stocks.

They offer traders a convenient way to gain exposure to a diversified portfolio of bonds through a single transaction.


Bond ETFs hold a basket of bonds, providing instant diversification.

This mitigates the risk associated with individual bonds.


Due to their exchange-traded nature, bond ETFs offer high liquidity.

Traders can buy or sell shares during trading hours at market price.


Bond ETFs provide daily transparency of holdings.

Traders can see the specific bonds held in the ETF.

This ensures clarity in what they own.

Lower Investment Threshold

Investors can purchase bond ETFs at a lower capital outlay compared to buying individual bonds, which makes them accessible to a broader range of traders.


Examples of Bond ETFs

Some examples of bond ETFs and some brief descriptions:

iShares Core US Aggregate Bond ETF (AGG)

Broad US bond exposure.

Vanguard Total Bond Market ETF (BND)

Diverse US bond market index.

iShares iBoxx $ Investment Grade Corporate Bond ETF (LQD)

High-quality/investment-grade corporate bonds.

This is the most liquid US corporate bond ETF.

Vanguard Short-Term Bond ETF (BSV)

Short-term US bonds.

Good for those looking to limit their portfolio duration/interest rate risk.

SPDR Bloomberg Barclays High Yield Bond ETF (JNK)

High-yield corporate bonds.

HYG is another option for high-yield.

iShares 20+ Year Treasury Bond ETF (TLT)

Long-term US Treasuries.

PIMCO Active Bond ETF (BOND)

Actively managed bond portfolio.

Vanguard Short-Term Corporate Bond ETF (VCSH)

Short-term corporate bonds.

Vanguard Intermediate-Term Corporate Bond ETF (VCIT)

Medium-term corporate bonds.

Vanguard Long-Term Corporate Bond ETF (VCLT)

Long-term corporate bonds.

iShares Short Treasury Bond ETF (SHV)

Short-term US Treasury bonds.

Fidelity Total Bond ETF (FBND)

Diverse bond strategy that’s actively managed.

iShares TIPS Bond ETF (TIP)

Inflation-protected US Treasuries.


PIMCO 25+ Year Zero Coupon U.S. Treasury Index ETF (ZROZ)

Zero-coupon US Treasuries.


Bond Futures: Characteristics & Advantages

Bond futures are standardized contracts to buy or sell a specific bond at a future date at a predetermined price.

They’re primarily used for hedging interest rate risk and speculation.


Bond futures allow traders/investors to control a large amount of bonds with a relatively small amount of capital.

This offers the potential for amplified returns.


Investors use bond futures to hedge against price movements in the bond market.

This can protect a portfolio from interest rate changes.

For example, if traders are long a lot of cash bonds, they can hedge some of that rate exposure by shorting in the futures markets.

This has to be done carefully, though, as bond futures have their own nuances to understand (such as rolling over contracts).


Traders can speculate on the future direction of interest rates using bond futures.

This involves predicting price movements to make a profit.

No Management Fees

Unlike bond ETFs, bond futures don’t come with management fees.


Bond Futures Examples

1. US Treasury Bond Futures (T-Bond Futures)

These futures contracts are agreements to buy or sell US Treasury bonds at a future date.

They are standardized and traded on exchanges like the Chicago Board of Trade (CBOT).

Who It’s Good For

Suitable for institutional investors, hedge funds, and speculators who wish to hedge against or speculate on changes in long-term interest rates.

2. Euro-Bund Futures

Euro-Bund Futures are based on German government bonds having a maturity of 8.5 to 10.5 years.

They’re one of the most traded government bond futures in the world.

Who It’s Good For

Ideal for investors looking to hedge or speculate on the movements of European bond markets.

They’re also used by pension funds and insurance companies to manage the risk of their bond portfolios.

3. 10-Year T-Note Futures

These futures contracts are based on the 10-year US Treasury note.

These are widely used for hedging and speculation related to the yield of the 10-year Treasury note.

Who It’s Good For

Suitable for a wide range of market participants, including financial institutions, investment managers, and individual traders seeking exposure to US Treasury notes with a medium-term maturity.


Each of these instruments serves a distinct purpose and caters to different trader/investor needs and risk profiles.

Traders must understand these characteristics and align them with their strategies and risk tolerance.


Comparative Analysis – Bond ETFs vs. Bond Futures

Trading and Settlement

Bond ETFs trade like stocks, with the price fluctuating throughout the day.

Bond futures have a settlement date in the future and typically involve a margin account.

Interest Rate Sensitivity

Bond ETFs have a direct sensitivity to interest rates.

As rates rise, the value of the underlying bonds tends to decrease.

Bond futures can be used to hedge against this interest rate risk.

Expense Ratio

Bond ETFs have an expense ratio, which is a fee for managing the fund.

Bond futures do not incur such fees, although there are commission costs and margin requirements.

Dividend Yield

Bond ETFs often distribute dividend yields from the underlying bonds, providing an income stream.

Bond futures don’t offer dividends.

Futures can, however, offer a yield in what’s known as the “roll yield.”

In a backwardated market (like US Treasuries normally), you have a positive roll yield because you keep rolling to a cheaper contract.

In a contango market (like gold), you have a negative roll yield because you keep rolling to a more expensive contract (this is because gold futures factor in holding and insurance costs).

Market Accessibility

Bond ETFs are accessible to all levels of traders/investors.

They’re ideal for those seeking exposure to the bond market without purchasing individual bonds.

Bond futures require a more sophisticated understanding of the market and are typically used by more experienced traders.


FAQs – Bond ETFs vs. Bond Futures

What are bond ETFs?

Bond ETFs are exchange-traded funds that invest in bonds and offer real-time trading on stock exchanges.

They can be used for regular long-term investment or as trading instruments.

What are bond futures?

Bond futures are standardized contracts to buy or sell a bond at a predetermined price at a future date.

How do bond ETFs work?

Bond ETFs work by pooling investor money to purchase a diversified portfolio of bonds.

This improves liquidity and accessibility.

How do bond futures work?

Bond futures work as agreements to buy or sell bonds at a future date – used for hedging or speculating on interest rate movements.

What are the differences between bond ETFs and bond futures?

The key differences between bond ETFs and bond futures include their structure, objective, and how they’re traded.

ETFs are more commonly for investment. Bond futures are more for hedging and trading.

Who should trade/invest in bond ETFs?

Investors looking for diversified exposure to the bond market with lower minimum investment requirements should invest in bond ETFs.

Traders who are looking for tighter spreads and more liquid options markets could consider ETFs like IEF, TLT, and LQD for this purpose.

Who should trade bond futures?

Traders seeking leverage and the ability to speculate on future interest rate movements should trade bond futures.

What are the risks associated with bond ETFs?

Risks associated with bond ETFs include:

  • interest rate risk
  • credit risk, and
  • liquidity risk

What are the risks associated with bond futures?

Risks associated with bond futures include:

  • leverage risk
  • market risk, and
  • settlement risk

How do interest rates affect bond ETFs and bond futures?

Interest rates affect bond ETFs and bond futures by influencing their pricing and yield, with rising rates typically leading to lower prices.

Can bond ETFs be used for hedging?

Yes, bond ETFs can be used for hedging against interest rate movements and diversifying a portfolio.

Can bond futures be used for hedging?

Yes, bond futures are commonly used for hedging against future interest rate changes.

What are the tax implications of investing in bond ETFs?

The tax implications of investing in bond ETFs include taxes on dividend income and capital gains taxes upon sale.

What are the tax implications of trading bond futures?

Trading bond futures may have different tax implications depending on the jurisdiction, including potential taxes on gains.

How does liquidity compare between bond ETFs and bond futures?

Liquidity can vary widely.

But by and large, bond ETFs offer higher liquidity through stock exchanges.

Bond futures’ liquidity depends on the specific contract and market conditions.

How are bond ETFs and bond futures helpful in a diversified portfolio?

Both bond ETFs and bond futures can be helpful in diversified portfolios by providing exposure to interest rates and the ability to hedge risk.

How can traders/investors choose between bond ETFs and bond futures?

Traders should choose between bond ETFs and bond futures based on their goals, risk tolerance, and need for leverage.

What strategies can be employed when trading bond futures?

Strategies for trading bond futures include:

  • hedging interest rate risk
  • speculating on future interest rate movements, and
  • spread trading

How do settlement processes differ for bond ETFs and bond futures?

Bond ETFs settle through the purchase and sale of ETF shares on exchanges.

Bond futures settle through cash or physical delivery at contract expiration.

Are bond ETFs or bond futures better for short-term trading strategies?

Bond ETFs are generally better for long-term investment strategies.

Bond futures are often preferred for short-term trading and hedging strategies.

Why isn’t there a TIPS or inflation-linked bond futures contract?

There isn’t a TIPS or inflation-linked bond futures contract because the market for these instruments is less developed.

Also, there’s less demand for hedging inflation risk through futures compared to other methods.



Both bond ETFs and bond futures offer unique advantages for traders.

Bond ETFs provide diversification, liquidity, transparency, and lower investment thresholds.

This makes them suitable for traders/investors looking for exposure to the bond market with less capital.

On the other hand, bond futures offer leverage, effective hedging mechanisms, and the potential for higher returns through speculation but require a deeper market understanding and come with higher risk.

Traders should carefully consider their goals, risk tolerance, and market expertise when choosing between these instruments.