- What happens when a bond expires? Will the mangers typically buy similar bonds or will they payout the cash (and hence the bond ETF will have a natural expiration)?
- So the difference between Distributing or Accumulating Bond ETF is that, the first one will payout the interest rate payments and the other will reinvest. Is that understood correctly?
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1Expiration is called maturity.– NayukiJun 13 at 19:37
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1You might find the answers to this question useful. Many bond ETFs roll over the bonds way before maturity.– AKdemyJun 13 at 22:57
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1 Answer
Bond ETFs are not bets on individual bonds, they are bets on interest rates (or credit spreads in the case of non-government bond ETFs). They will reinvest capital as bonds mature, and may even sell bonds before maturity (e.g. if their credit rating degrades below the threshold of the ETF's parameters) and buy new ones to replace them. So they will not "expire" naturally.
And yes, Distributing ETFs pay "dividends" from the interest and capital gains accumulated in the ETF, while Accumulating retain them to buy more investments.
Note that the "dividends" are not necessarily direct payments of the interest from the bonds; it will be paid periodically (usually monthly or quarterly) from its internal funds. It mostly comes from interest payments but does not have to be the exact amount of interest from the bonds.
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1"may even sell bonds before maturity (e.g. if their credit rating degrades below the threshold of the ETF's parameters) and buy new ones to replace them." I would think this has more to do with the ETF's target for average duration, rather than credit rating. Jun 14 at 12:54
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Maybe, although as bonds mature new bonds could be bought to extend the average duration; I was giving an example, not the only reason for selling before maturity. Jun 14 at 13:30