Bond ETFs definitely pay dividends

By
USA Today
December 25, 2007, 1:05 AM ET
2 min read

— -- Q: I bought an exchange-traded fund (ETF) that owns bonds but trades like a stock. Does it distribute the same dividends as the bonds it owns?

A: The rising popularity of exchange-traded funds has been staggering. ETFs let you invest in a diversified basket of stocks or, yes, bonds.

That's a good thing in many cases since bonds can be arcane and difficult to deal with. For many investors used to buying stocks, the ability to buy a diversified basket of bonds using one ticker symbol is attractive. You can buy these bond ETFs using your existing brokerage firm and may be able to buy them for low commissions.

For instance, Vanguard, a source for many low-cost ETFs, offers several bond ETFs. It offers the Total Bond Market ETF bnd, which owns bonds of many different maturities as well as the Short-Term Bond ETF bsv and Inter-Term Bond ETF biv.

And iShares, which has been a leader in the area of bond ETFs, offers the broad iShares Lehman Aggregate Bond Fund agg and many specialty bond ETFs, such as the iShares iBoxx High Yield Corporate Bond Fund hyg.

But to answer your question, when you buy these ETFs you get two ways to profit. First, if the value of the bonds owned by the ETFs rise or fall, the share price of the ETF rises and falls. However, it doesn't stop there. When the coupon payments are made by the bonds, those payments are passed on to you in their entirety.

For instance, the average coupon on the iShares iBoxx High Yield Corporate Bond Fund is 8.1%, according to iShares.com.

There's just one very important thing to remember. These ETFs aren't free. You must pay a transaction fee for the convenience. The iShares Lehman Aggregate Bond Fund, for instance, charges 0.24% a year, and the Vanguard Total Bond Market ETF charges 0.11%.

Matt Krantz is a financial markets reporter at USA TODAY. He answers a different reader question every weekday in his Ask Matt column at money.usatoday.com. To submit a question, e-mail Matt at mkrantz@usatoday.com. Click here to see previous Ask Matt columns.