Exchange-Traded Funds and Fixed Income: Overview

Fixed-income mutual funds typically invest in all types of bonds offering broad-based exposure.

You can drill down to certain areas

Fixed-income exchange-traded funds offer the ability to get targeted exposure to a particular fixed-income sector. For example, if you're interested in long-term corporate bonds, there are ETFs that offer that particular exposure only. This ability to customize lets investors combine multiple ETFs to create their own personalized, broad-based fixed-income portfolio.

But there may be more risk

When you invest in a broad-based bond fund, the different types of bonds and different bond maturities create diversification which reduces the risk of the fund. When you buy a fixed-income ETF only focusing on a particular type of bond, such as long-term corporates, you expose yourself to additional risks. Long-term corporate bonds usually offer attractive interest rates compared with Treasuries but are exposed to higher interest-rate risk and credit risk. An investor needs to be aware of these additional risks.