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I get that bond price can change depending on the current interest rate (since interest rate of the bond doesn't change). But if this were the only factor, price of the bond ETFs (like BND) would stay relatively constant (rising or falling temporarily depending on the interest rate changes), which is not the case.

So, my question is, what causes price of bond ETFs to rise over long period of time? In another words, why are they a good investment, excluding the dividends (or is it just because of consistent stable dividends)?

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So, my question is, what causes price of bond ETFs to rise over long period of time? In another words, why are they a good investment, excluding the dividends (or is it just because of consistent stable dividends)?

The rising prices due to falling interest rates have already been covered. Another reason for rising ETF prices can be that the ETF is not distributing interest payments but reinvesting them (acc. ETF).
Most people buy (high quality) bonds as a store of value that reduces the volatility of your portfolio and can be used as an investment reserve to buy the dip. For this it is more important to have a low correlation with stock returns than a high return in the first place.

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price of the bond ETFs (like BND) would stay relatively constant (rising or falling temporarily depending on the interest rate changes), which is not the case.

Why do you say the changes would be temporary? If I hold a 5% bond and rates drop, the value of that bond increases and stays high until rates rise back again.

So yes, interest rates are the main factor for the value of bond ETFs, but they're not the only factor. The index tracks is a broad investment-grade index (not just government bonds), so changes in the credit risk of the bonds it owns can change the value as well.

That said, the value of the ETF has been relatively stable, fluctuating from a low of 77 in 2018 to a high of about 90 in mid-2020, somewhat settling at about 85 since then.

why are they a good investment, excluding the dividends (or is it just because of consistent stable dividends)?

Investors typically invest in investment-grade fixed income securities (including ETFs) for the income more than growth. So the dividend yield is more important for fixed-income ETFs than price growth. (price growth is "gravy" as they say)

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  • If I hold a 5% bond and rates drop, the value of that bond increases and stays high until rates rise back again True, but not entirely applicable to bond ETFs. If rates drop (or rise) and stay there, ETF price will stabilize as underling bonds with old rates mature and are replaced with new bonds with new rates.
    – maxc137
    Commented Sep 28, 2021 at 10:19
  • @МаксимКошевой actually it's more likely that bonds are sold and replaced with new bonds to keep a target duration, but in either case the value of the ETF will still be driven by interest rates. If I sell a 5% bond mature at a premium because of lower rates, I can buy a higher amount of bonds at lower rates. It's only when rates go back up that the new bonds drop in value.
    – D Stanley
    Commented Sep 28, 2021 at 13:18
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The price of BND, for example, increased from about $75 to $85 over the past 15 years, reflecting both a decrease in interest rates along the entire yield curve and a perceived decrease in credit risk among various bond classes (corporate, junk, government).

Absent a change in overall rates or a change in perceived risk, the price of BND should be relatively constant, as you wrote.

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