What Are the Basic Kinds of Bond Funds? - dummies

What Are the Basic Kinds of Bond Funds?

By Russell Wild

With hundreds upon hundreds of bond funds to choose from, each representing a different basket of bonds, where do you start? That part is actually easy: You start with the particular class of bonds you want to own. Treasuries? Corporate bonds? Munis? Long-term? Short-term? Investment-grade? High-yield? A blend of all of the above?

But knowing what class of bonds you want in the basket isn’t enough. You also need to know what kind of basket you want.

Bond baskets (funds) come in five varieties:

  • Open-end mutual funds, typically referred to simply as mutual funds, are far and away the most common.

  • Closed-end mutual funds, usually referred to only as closed-end funds, offer comparatively greater return for greater risk.

  • Exchange-traded funds (ETFs) are the newer kids on the block, catching on very quickly — for good reason.

  • Unit investment trusts are not well known but perhaps worth knowing.

  • Exchange-traded notes (ETNs) are sort of bonds within bonds with bells and whistles and their own unique characteristics.

The table offers an overview of how these types of funds compare.

Comparing the Five Kinds of Bond Funds
Fund Type How Many Funds Are There? Do They Offer Diversification? Active Management or Passive (Index)? Fee or Commission to Buy or Sell? Average Yearly Expense Ratio
Mutual funds 1,739 Yes Most are active Sometimes 1.01 percent
Closed-end funds 414 Yes Active Yes 1.27 percent
Exchange-traded funds 150 Yes Most are index Usually 0.30 percent
Unit investment trusts Varies Yes Quasi-active Yes 0.81 percent
Exchange-traded notes 40 Yes Passive-leveraged Yes 0.90 percent