Bond ETF vs Stock ETF: What's the Difference?

We provide a complete comparison guide on bond ETFs versus stock ETFs.

kent
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Research Lead
Reviewed by: etf.com Staff
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Edited by: etf.com Staff

Many investors use stock ETFs and bond ETFs to build a diversified portfolio. Therefore, it’s not always an either/or decision between the two main types of ETFs. Whatever an investor decides, it’s important to begin the selection process by learning the fundamental differences between a bond ETF and a stock ETF, as well as the pros and cons of investing in each. 

Learn the basics on these two primary types of ETFs and build a better portfolio.  

What Are Bond ETFs and Stock ETFs? 

Bond ETFS and stock ETFs are types of exchange-traded funds, which are investment vehicles that trade on a stock exchange like individual stocks. ETFs typically track the performance of a benchmark index. For example, a stock ETF might track the S&P 500 index and a bond ETF might track the Bloomberg U.S. Aggregate Bond Index. 

As measured by assets under management, the largest bond ETF is the Vanguard Total Bond Market ETF (BND), and the largest stock ETF is the SPDR S&P 500 ETF Trust (SPY).  

What Is a Bond ETF? 

A bond ETF is an exchange-traded fund that invests primarily in fixed income securities such as bonds. A bond is a debt security that represents a loan made by an investor to a borrower, typically a corporation or a government 

Bond ETFs are generally categorized by maturities, credit ratings and other characteristics. By investing in a bond ETF, an investor can gain exposure to a diversified portfolio of bonds with lower transaction costs and greater liquidity compared to investing in individual bonds. 

The value of a bond ETF will fluctuate based on changes in the market value of the underlying bonds, as well as changes in interest rates, credit quality and other factors affecting the bond market. Some bond ETFs may also pay regular interest income to investors, which can provide a steady stream of cash flow. 

What Is a Stock ETF? 

A stock ETF is a type of exchange-traded fund that invests primarily in stocks, which are equity securities that represent ownership in a company. Stock ETFs typically track the performance of an underlying benchmark index. For example, an ETF that tracks the S&P 500 would track an index of stocks that represent the 500 largest publicly traded companies in the U.S. 

Stock ETFs can provide a way to invest in a specific sector or market segment, such as technology or emerging markets, without having to pick individual stocks. By investing in a stock ETF, an investor can gain exposure to a diversified portfolio of stocks with lower transaction costs and greater liquidity compared to investing in individual stocks.  

The value of a stock ETF will fluctuate based on changes in the market value of the underlying stocks, as well as changes in the overall stock market. Some stock ETFs may also pay dividends to investors, which can provide a source of income in addition to potential capital gains. 

Bond ETF vs Stock ETF: The Differences 

Bond ETFs and stock ETFs are designed to meet different investment objectives, and have different risk and return profiles. Investors should carefully consider their investment goals and risk tolerance before deciding which type of ETF to invest in.  

The main differences between bond ETFs and stock ETFs are: 

  • Investment objective: Bond ETFs typically invest in a portfolio of fixed income securities, such as government bonds, corporate bonds and municipal bonds, with the goal of generating income and preserving capital. Stock ETFs, on the other hand, invest in a portfolio of stocks with the goal of generating capital appreciation. 
  • Risk profile: Bond ETFs are generally considered less risky than stock ETFs, as they invest in fixed income securities that have a fixed maturity date and a set interest rate. Stock ETFs, however, are subject to more market volatility and can experience significant price fluctuations. 
  • Return potential: Bond ETFs typically offer lower potential returns compared to stock ETFs. However, bond ETFs may offer more stable returns over the long term. 
  • Diversification: Both bond ETFs and stock ETFs can offer diversification benefits, but in different ways. Bond ETFs can provide diversification by investing in a basket of bonds with varying maturities, credit ratings and other characteristics. Stock ETFs can provide diversification by investing in a basket of stocks with varying sectors, market capitalizations and other characteristics. 
  • Yield: Bond ETFs generally provide a regular income stream in the form of interest payments, while stock ETFs may provide income in the form of dividends but are generally not designed to provide regular income. 

Pros and Cons of Investing in Bond ETFs 

Investing in bond ETFs can offer a convenient way to gain exposure to a diversified portfolio of bonds with lower transaction costs and greater liquidity than individual bonds. However, investors should carefully consider the potential disadvantages of bond ETFs before investing. 

The pros and cons of bond ETFs include: 

Pros of Bond ETFs 

  • Stability: Bonds generally produce stable returns over time, making them suitable investments for conservative investors.  
  • Diversification: Bond ETFs can offer a way to diversify a portfolio by investing in a basket of bonds with varying maturities, credit ratings and other characteristics. This can help reduce risk and provide more stable returns. 
  • Liquidity: Bond ETFs are traded on stock exchanges, making them more liquid than individual bonds. This means investors can buy and sell bond ETFs more easily, and at lower transaction costs, compared to buying and selling individual bonds. 
  • Low minimum investment: Bond ETFs can offer a low minimum investment, making them more accessible to individual investors who may not have the capital to invest in individual bonds. 
  • Income: Many bond ETFs pay regular interest income to investors, which can provide a steady stream of cash flow. 

Cons of Bond ETFs

  • Interest rate risk: Bond prices are sensitive to changes in interest rates, and if interest rates rise, bond prices may fall. This can have a negative impact on the value of a bond ETF. 
  • Credit risk: Bond ETFs can also be subject to credit risk, which is the risk that the issuer of a bond may default on its payments. This risk is greater for bond ETFs that invest in lower-quality or noninvestment-grade bonds. 
  • Fees: Bond ETFs charge fees, which can eat into returns over time. It's important to compare fees across different bond ETFs to find the most cost-effective option. 
  • Market risk: The value of a bond ETF can fluctuate based on changes in the market value of the underlying bonds, as well as changes in interest rates, credit quality and other factors affecting the bond market. 
  • Low performance: Bond ETFs generally produce returns over time that may keep up with the average rate of inflation but significantly below average returns for stocks. 

Pros and Cons of Stock ETFs 

Overall, investing in stock ETFs can provide a convenient and cost-effective way to gain exposure to a diversified portfolio of stocks. However, investors should carefully consider the potential risks and drawbacks associated with stock ETFs before investing.  

The pros and cons of stock ETFs are: 

Pros of Stock ETFs 

  • Potential for high returns: Stock ETFs generally produce higher returns over time compared to most other asset classes, including bonds, commodities and real estate
  • Diversification: Stock ETFs can provide a way to gain exposure to a diversified portfolio of stocks, helping to reduce risk and provide more stable returns. This can be especially important for investors who may not have the time or expertise to select individual stocks. 
  • Low minimum investment: The minimum investment for stock ETFs is typically the price of one share, which is often lower than the minimum investment for mutual funds or a portfolio of individual stocks.  
  • Cost-effective: Stock ETFs generally have lower fees than actively managed funds, which can help to maximize returns over time. 

Cons of Stock ETFs 

  • Market risk: The value of a stock ETF can fluctuate based on changes in the market value of the underlying stocks, as well as changes in overall market conditions. 
  • Lack of control with investment selection: When investing in a stock ETF, investors are not able to select individual stocks themselves, and are instead relying on the fund manager's selection or limited to the holdings found in the index. This can be a disadvantage for investors who want more control over their investment decisions. 
  • Potential for underperformance: Because stock ETFs are designed to track a specific index, they are unlikely to outperform the market. This means investors may miss out on potential gains from individual stocks that perform better than the overall market. 
  • Dividend income may be lower: Some stock ETFs may not provide as much dividend income as individual stocks, which can be a disadvantage for income-seeking investors. 

Bond ETF vs Stock ETF: Who Should Invest? 

Bond ETFs are generally suitable for conservative investors or those seeking income, while stock ETFs are generally best for long-term investors seeking growth. Bond ETFs and stock ETFs can also work well in a diversified portfolio. However, when considering each type of ETF individually, one may be more appropriate than the other.  

Who Should Invest in Bond ETFs? 

Bond ETFs can be appropriate for a variety of investors, depending on their investment goals and risk tolerance. Here are some examples of investors who may consider investing in bond ETFs: 

  • Income-seeking investors: Bond ETFs can provide a steady stream of income in the form of regular interest payments. This can be attractive to retired investors and those who are looking for a source of income to supplement their portfolio. 
  • Conservative investors: Bond ETFs can be less risky than stocks, making them a good choice for investors who are more conservative and want to reduce their overall portfolio risk. 
  • Diversification-seeking investors: Bond ETFs can offer a way to diversify a portfolio and reduce risk by investing in a basket of bonds with varying maturities, credit ratings and other characteristics. 
  • Long-term investors: Bond ETFs can be a good choice for long-term investors who want to hold a diversified portfolio of bonds or in combination with stock ETFs. 

Who Should Invest in Stock ETFs? 

Stock ETFs can be appropriate for a variety of investors, depending on their investment goals and risk tolerance. Here are some examples of investors who may consider investing in stock ETFs: 

  • Growth-oriented investors: Stock ETFs can provide exposure to a diversified portfolio of stocks, which can potentially provide capital appreciation over the long term. This can be attractive to investors who are seeking growth and willing to accept higher levels of risk. 
  • Diversification-seeking investors: Stock ETFs can offer a way to diversify a portfolio and reduce risk by investing in a basket of stocks with varying sectors, market capitalizations and other characteristics. 
  • Passive investors: Stock ETFs are passively managed, meaning that they track an index and do not require active management by a fund manager. This can be attractive to investors who want a low-cost and easy way to invest in the stock market. 
  • Long-term investors: Stock ETFs can be a good choice for long-term investors who want to hold a diversified portfolio of stocks and are willing to accept the risks associated with stock investing. 
  • Income-seeking investors: Some stock ETFs may provide dividend income, which can be attractive to investors who are seeking income from their investments. 

Bottom Line 

Bond ETFs are generally best for conservative investors and those seeking income from their investments, while stock ETFs are best suited for long-term investors seeking growth over time. However, both types of ETFs can complement each other and combine to build a diversified portfolio.  

As always, it's important for investors to carefully consider their investment goals, risk tolerance and overall financial situation before investing in bond ETFs or stock ETFs.  

Kent Thune is Research Lead for etf.com, focusing on educational content, thought leadership, content management and search engine optimization. Before joining etf.com, he wrote for numerous investment websites, including Seeking Alpha and Kiplinger. 

 

Kent holds a Master of Business Administration (MBA) degree and is a practicing Certified Financial Planner (CFP®) with 25 years of experience managing investments, guiding clients through some of the worst economic and market environments in U.S. history. He has also served as an adjunct professor, teaching classes for The College of Charleston and Trident Technical College on the topics of retirement planning, business finance, and entrepreneurship. 

 

Kent founded a registered investment advisory firm in 2006 and is based in Hilton Head Island, SC, where he lives with his wife and two sons. Outside of work, Kent enjoys spending time with his family, playing guitar, and working on his philosophy book, which he plans to publish in the coming year.