Bond ETFs for European investors: duration, yield, and what actually makes them safe
Equity ETF buyers usually know what they own. Bond ETF buyers often do not — and 2022, when supposedly safe bond funds fell 15% alongside stocks, was the year that ignorance got expensive. Bonds still belong in most portfolios, but only on terms you understand: what duration measures, what the yield actually promises, and which kind of bond fund does which job.
What a bond ETF actually holds — and why it never matures
A bond ETF holds hundreds or thousands of bonds and, unlike a single bond, never matures: as bonds age out of the index's maturity window, the fund sells them and buys newer ones, maintaining a roughly constant maturity profile forever. You are not holding bonds to maturity; you are holding permanent exposure to a segment of the bond market, whose price moves daily with interest rates.
This is the source of most bond-fund disappointment. A single bond held to maturity returns its face value regardless of rate moves along the way. A bond fund has no such anchor date — when rates rise, its price falls, and the recovery comes gradually, through reinvesting at the new higher yields rather than through any promised repayment. Neither structure is safer; they distribute the same interest-rate risk differently across time.
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Duration: the one number that explains everything
Duration, listed on every factsheet in years, is the fund's sensitivity to interest rates: a duration of 7 means the fund loses roughly 7% for each percentage point that yields rise (and gains 7% when they fall). It is the single most important number on a bond fund's page, and the explanation of 2022 in one line: yields rose about 3 percentage points, so a duration-7 aggregate fund lost about 20% — exactly as designed, to the shock of everyone who had not read the label.
Duration is a choice, not a fate. Short-duration funds (1–3 years) barely move when rates change and behave almost like cash with a better yield. Intermediate funds (5–8 years) are the classic diversifier, with meaningful gains when rates are cut in a recession. Long-duration funds (15+) are powerful recession hedges and brutal in inflation — a tool for deliberate use, not a default. Matching duration to your horizon and purpose is most of bond investing.
Reading yield, and choosing between fund types
The number that predicts your return is yield to maturity (YTM), shown on every factsheet: the annualised return of the current portfolio if yields stay put. It is a far better guide than the distribution yield (backward-looking) or past performance (which for bonds actively misleads — the great returns of 2010–2020 were rates falling to zero, a trick that cannot repeat from here). Today's YTM minus the TER is a reasonable expectation of what you will earn.
The main menu: euro government bond funds are the pure diversifier — highest credit quality, no currency risk for eurozone investors, best behaviour in equity crashes. Aggregate funds add investment-grade corporate bonds for slightly more yield and slightly more equity correlation. Corporate and high-yield funds pay more but fall with stocks in crises — remember 2008 and March 2020 — which undermines the reason most people hold bonds at all. And global bond funds should be EUR-hedged, always: unhedged currency swings are several times larger than bond returns themselves.
A defensible default for a European portfolio: an intermediate euro government or EUR-hedged global aggregate fund, accumulating share class, TER under 0.15%, fund size over €500 million. Sized so that the equity/bond split — not the bond picking — sets your portfolio's risk. The bond fund's job is to be boring on the day your equities are not.
Key takeaway
A bond fund is permanent, rolling exposure to interest rates: duration tells you the risk, yield-to-maturity tells you the expected reward, and credit quality tells you whether it will actually show up in an equity crash. Hedge global bonds to euros, match duration to your horizon, and let the stock/bond split do the heavy lifting.
This article is educational content, not investment advice. Capital is at risk; past performance does not predict future returns. Tax treatment depends on your individual circumstances and country of residence.