How does a 10-year Treasury ETF work?


Quick Answer

Treasury exchange-traded funds, or ETFs, invest mainly in U.S. Treasury notes, states ETF Database. The value of an ETF bond rises and falls in accordance with the value of its underlying bonds, according to Charles Schwab & Co., Inc.

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Full Answer

Treasury bond ETFs offer almost no credit risk and moderate interest rate risk because the U.S. government is not likely to default on its debt, says EFT Database and Charles Schwab & Co., Inc. A bond ETF offers investors lower costs and same-day trading. However, if interest rates rise before the bonds reach their maturity date, investors may need to hold the bonds until maturity to see a return on their investment. Bond ETFs report the fluctuating daily values; if interest rates rise above that of the rates of the bonds in the portfolio, then the value of those bonds decreases, explains Charles Schwab & Co., Inc.

Before buying into a bond ETF, an investor should consider the index the ETF follows, states Charles Schwab & Co., Inc. For example, the Barclays U.S. Aggregate Bond Index is composed of thousands of bonds, some backed by the U.S. Treasury. Ten-year bonds mature in 10 years; Investopedia defines maturity date as the date in which the bond becomes due and both the face value and accumulated interest are paid out to the bondholder.

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