- tracking a certain index, such as the DEX Universe Bond Index,
- buying bonds from a certain country, like Canada or the United States,
- buying government bonds, or
- buying corporate bonds.
Before you invest, read the fund’s prospectus to understand the fund’s approach to investing and the risks.
5 differences between bonds and bond funds
|Feature||Individual bonds||Bond mutual funds and ETFs|
|1. Choosing investments|
|You or your adviser chooses individual bonds.||A professional fund manager chooses individual bonds for the fund.|
|Risk depends on the type of bond you invest in. More variety leads to better diversification. Unless the issuer defaults, you will get back the face value at maturity.||Mutual funds and ETFs are diversified – they hold many investments. But risk will vary depending on the number of and types of bonds held in the fund. More variety leads to better diversification.|
With a mutual fund or ETF, you could lose money. The value of most funds will change as the value of their investments goes up and down.
|You know exactly how much interest you’ll receive and can calculate what your return will be, whether you hold the bond until maturity or sell it before the maturity date.||You generally won't know how much you’re going to receive in any given year.|
This is because the fund itself doesn’t have a maturity date. Income from a fund fluctuates as the underlying bond investments change. Returns may be a combination of interest and capital gains.
|4. Buying and selling|
|You can buy and hold a bond to maturity and get back the face value, or you can sell it before it matures.|
Your ability to sell varies depending on the type of bond. Some types of bonds, like strip bonds, can be harder to sell than others.
|You can buy and sell mutual funds on any business day.|
You can buy and sell ETFs on the exchange they trade on, on any trading day.
|Commissions are built into the price of the bond.||You may pay a sales charge when you buy or sell a mutual fund.|
You’ll usually pay a commission every time you buy and sell an ETF.
Mutual funds and ETFs charge management fees and operating expenses (known as the management expense ratio or MER).
Content in this section is provided in partnership with Investor Education Fund, a non-profit organization founded and supported by the Ontario Securities Commission that provides unbiased and independent financial tools to help Canadians make better money decisions. To find out more, go to: GetSmarterAboutMoney.ca