So I have bought a few stock-based ETF and can see the logic behind picking them but I am curious what people base the decision of bonds on?
For example, what is the difference between UK and US (For the same time frame) historically?
What is the difference between short and long term bonds i.e. 1-3 or 7-10 years?
Any other useful information about bonds
The main difference is the credit rating of the bond seller. For example, the UK and US governments have excellent credit ratings so they are safe but offer really low yields. Companies also issue bonds and they are obviously riskier than governments but offer better yields. Also short term bonds are less risky, because you get your money (principal) back quicker and lower probability of interest rate increase so they offer lower yields than long term bonds. If you go to the bond fund manager website you can have a look at the distribution of the bonds in the funds and the credit ratings. Credit ratings go from AAA, AA, A, BBB, etc all the way to C and D (default), bonds over BBB are considered high grade or investment grade and anything below are high yield or “junk” bonds, which I wouldn’t recommend.
And the US government has historically defaulted 4 times AFAIK.
That doesn’t mean anything. Investing is about future expectations. Accounting is about the past.
So I am still a little confused on the two offers on Freetrade
us treasury 1-3 year bond vs us treasury 7-10 year bond
Havent got my phone with me atm but pretty sure they are close to the names
What’s confusing you about them?
So what is difference between 1-3 and 7-10
What exactly does the number of years mean
Also why is there no 4-6?
That’s how long the bonds in the etf have left on them
That is the time to maturity of the bonds that make up the fund. A US government bond is essentially a loan to the US government and the maturity is the time before the government gives you your money back (with interest paid regularly). In an ETF you are buying a bunch of bonds, the ETFs you are talking about specialise in bonds of this time to maturity only, other ETFs have a mix of different ones but they can be from less than 3 months to 30+ years. As I said before, a bond with a longer time to maturity will usually pay higher interest.
Government bonds especially short ones are sensitive to central bank interest rates. A gilt near maturity will pay a fraction higher interest than base rate. If interest rates rise then the capital value of the bond will fall.
A couple of problems with bond funds is the charges eat into the interest which is a problem for the least risky ones.
At the other end some bond trackers track by total debt exposure. Which means the most indebted companies’ debt make up the biggest part of the fund.