Archived article: Please note that tax, investment, pension and ISA rules can change and the information and any views contained in this article may now be inaccurate.
It is easier than you might think to invest in bonds via passive investment products such as tracker funds and ETFs (exchange-traded funds).
Bonds are popular with individuals looking to generate income. They are lower-risk investments and can either be bought as individual products or bundled together inside funds.
There are a few reasons why buying individual bonds may not suit everyone. Choosing a bond requires specialist knowledge and significant amounts of research. The number of bonds needed to achieve good diversification may be prohibitive for some investors. Pricing is generally less attractive for retail investors compared with institutional investors.
How do passive bond funds work?
Funds are a straightforward way for retail investors to get exposure to bonds.
You might think all bond funds are actively managed investment products. However, there are various passive funds that provide broad exposure to bonds.
They track bond indices and seek to mirror performance. For example, many bond ETFs follow the Bloomberg Barclays Global Aggregate Bond index, a basket of investment grade government and corporate bonds. This is the bond equivalent of the FTSE All-World index, which represents 90% to 95% of the world’s investable stock market by value.
A useful measure for comparing different bonds and bond funds is yield to maturity. This is the total expected annual return of the portfolio assuming bonds are held until maturity.
Different types of bonds
Bonds can be issued by governments and companies. In the UK government bonds are called Gilts because historically the paper certificates were issued with a gilded golden edge. In the US bonds are called Treasuries.
Governments all over the world issue their own bonds to finance public spending. Risks to consider with overseas bonds are the fluctuation of exchange rates and the creditworthiness of the government.
The corporate bond market is split into investment grade and non-investment grade bonds, sometimes referred to as high yield or junk bonds.
Investment grade bonds are issued by companies which are deemed to be financially sound. This means they are expected to pay the annual interest on time and repay the capital in full at maturity, which is the date when a bond expires.
High-yield debt tends to be issued by lower quality companies where there is less certainty around the ability of the firm to keep up its interest payments and repay the capital.
Consequently, high yield bonds pay higher annual rates of interest than investment grade bonds to compensate for the higher risk.
How do bonds work?
Bonds are issued to investors in exchange for cash and must be repaid over an agreed time frame ranging from three months up to 50 years. The expiry date is called the maturity of the bond.
Gilts are issued at par value in units of £100 with a promise to pay an annual coupon, which is the interest payment, expressed as a percentage of the price.
Let’s take a Gilt that expires in five years’ time, and which yielded 5% at the time of issuance. Someone who invested £1,000 when the Gilt launched would get £50 a year as income until the bond matures. At the end of that period, the investor would get their initial £1,000 back.
The price of a bond can go up or down in the intervening period, which will change the yield. It is worth remembering the price of a bond moves in the opposite direction to the yield.
An important consideration when investing in bonds is their sensitivity to changes in interest rates.
Duration is a measure of this sensitivity. The thing to remember is that higher coupon bonds and longer dated bonds are more sensitive to changes in interest rates, while shorter dated and lower coupon bonds are less sensitive. In general, the higher the duration, the more a bond’s price will drop as interest rates rise.
You can find bond ETFs that invest in either short or long duration bonds, or a mixture of both.
Why fund size matters
Key considerations to think about when investing in ETFs are the size of the fund and how much it charges.
Larger funds benefit from economies of scale which they can pass on to investors via lower charges. Minimising costs remains an important principle in investing which helps to maximise returns.
| Largest ETFs Tracking Global Bonds | ||
|---|---|---|
| Charges | Size (£bn) | |
| iShares Core Global Aggregate Bond UCITS ETF USD Hedged Acc | 0.1% | 2.7 |
| iShares Core Global Aggregate Bond UCITS ETF GBP Hedged Dist | 0.1% | 1.1 |
| SPDR Bloomberg Global Aggregate Bond UCITS ETF USD Hedged Dist | 0.1% | 0.7 |
| Vanguard Global Aggregate Bond ETF UCITS ETF USD Hedged Acc | 0.08% | 0.4 |
| Amundi Core Global Aggregate Bond UCITS ETF Hedged GBP Dist | 0.08% | 0.3 |
Source: JustETF, as of 24 October 2025
The table lists the largest ETFs which track the performance of the Bloomberg Barclays Global Aggregate Bond index.
At top of the list is the iShares Core Global Aggregate Bond UCITS ETF GBP Hedged. The fund is invested in around 20,000 bonds and has an annual charge of 0.1% a year, equivalent to £10 for every £10,000 invested.
The manager seeks to replicate the performance of the underlying index by sampling a selection of the most relevant index constituents. The currency exposure is hedged back to sterling to help mitigate the impact of currency fluctuations.
Martin Gamble: Shares and Markets Writer
Martin Gamble is Shares and Markets writer at AJ Bell. He was previously the Education Editor of Shares Magazine. He has been with the business since 2019.
Martin graduated from the University of Kent in...
