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Bond ETFs are easily available on stock exchanges today. Bond mutual funds have been around for a long time.

I am not sure which to buy to build an income stream as a fixed-income investor. What are the pros and cons of bond ETFs versus bond mutual funds?

  • The 'F' in "ETF" stands for Fund. That is, a "Bond ETF" is a bond fund. – Pete Becker Feb 5 '17 at 11:38
  • I'd generalize this slightly -- I have never heard an explanation of how being Exchange Traded is supposed to benefit anyone but day traders. – keshlam Feb 5 '17 at 14:54
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Bond ETFs are just another way to buy a bond mutual fund. An ETF lets you trade mutual fund shares the way you trade stocks, in small share-size increments. The content of this answer applies equally to both stock and bond funds.

Feature                         Mutual Fund                ETF
__________                      ____________               _______
Purchasing time                 End of day                 Midday
Holding Fees (Expense Ratios)   Generally higher           Generally lower
Purchase/redemption fees        Zero or significant        Zero or same as stock*
Minimum for initial buy         Generally higher           Price of a share
Additional buy increments       Any amount                 Whole shares
Dividend reinvestment           Generally yes              Generally yes
Value = underlying holdings     Almost always              A little drift

* including bid/ask spread, which does not apply to mutual funds

If you are intending to buy and hold these securities, your main concerns should be purchase fees and expense ratios. Different brokerages will charge you different amounts to purchase these securities. Some brokerages have their own mutual funds for which they charge no trading fees, but they charge trading fees for ETFs. Brokerage A will let you buy Brokerage A's mutual funds for no trading fee but will charge a fee if you purchase Brokerage B's mutual fund in your Brokerage A account.

Some brokerages have multiple classes of the same mutual fund. For example, Vanguard for many of its mutual funds has an Investor class (minimum $3,000 initial investment), Admiral class (minimum $10,000 initial investment), and an ETF (share price as initial investment). Investor class has the highest expense ratio (ER). Admiral class and the ETF generally have much lower ER, usually the same number. For example, Vanguard's Total Bond Market Index mutual fund has Investor class (symbol VBMFX) with 0.16% ER, Admiral (symbol VBTLX) with 0.06% ER, and ETF (symbol BND) with 0.06% ER (same as Admiral). See Vanguard ETF/mutual fund comparison page. Note that you can initially buy Investor class shares with Vanguard and Vanguard will automatically convert them to the lower-ER Admiral class shares when your investment has grown to the Admiral threshold.

Choosing your broker and your funds may end up being more important than choosing the form of mutual fund versus ETF. Some brokers charge very high purchase/redemption fees for mutual funds. Many brokers have no ETFs that they will trade for free. Between funds, index funds are passively managed and are just designed to track a certain index; they have lower ERs. Actively managed funds are run by managers who try to beat the market; they have higher ERs and tend to actually fall below the performance of index funds, a double whammy.

See also Vanguard's explanation of mutual funds vs. ETFs at Vanguard.
See also Investopedia's explanation of mutual funds vs. ETFs in general.

  • Thanks for the answer. Upvoted. There seems to be little reason to buy bond mutual fund given that fees for bond etfs are lower. – curious Feb 8 '17 at 0:46
  • Well, it depends how much you have to invest. If you have $10K, the Vanguard mutual fund has the same ER and you can invest in smaller increments. But it all depends on your situation! – OneTruDragonGirl Feb 8 '17 at 19:24

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