What is the job?
Ballast, liability matching, income, or tactical rate view are different jobs and should not be mixed together.
By the UK Tax Drag editorial team · Reviewed
This is a decision framework, not the comparison tool
This page is an editorial framework — it teaches you the three questions to ask before comparing bond ETFs (duration, hedging, credit). It is not the interactive comparison tool.
- For interactive side-by-side ETF comparison: ETF Compare tool
- For the full map of UK Tax Drag ETF tools: ETF Tools Map
- For metric formulas (volatility, beta, tracking error): ETF Metrics Transparency
Research snapshot
Last reviewed
23 April 2026
Who this is for
UK investors deciding whether a bond sleeve should be broad global ballast, a gilt allocation, or something else entirely.
Default answer
Start with the job of the bond sleeve, then compare duration and hedging only within that job.
Main risk
Buying bond funds for yield while ignoring duration or currency behaviour that matters more to the portfolio.
The three questions that matter
Question 2
How much duration?
Higher duration usually means more sensitivity to rate changes. That can be useful or painful depending on the role of the sleeve.
Question 3
Should it be hedged?
For UK investors using bonds as ballast, sterling-hedged global aggregate funds often make more sense than leaving the currency swing unexamined.
Practical routes
| If the job is... | Likely route | Professional read |
|---|---|---|
| Broad diversified ballast | AGGU / VAGP | Usually cleaner for a sterling-based investor than unhedged global bond exposure. |
| Specific UK gilt sleeve | VGOV | Useful when the plan calls for gilts specifically, not when you really want broad bond diversification. |
| Income replacement | Usually not the first bond-ETF question | Start with the spending plan. Bond yield alone is not a complete portfolio answer. |
Common mistake: treating bond ETFs as if they are all just "safer assets". Duration, credit mix, and hedging can change the portfolio behaviour a lot more than the label suggests.
Best next pages
Portfolio
Use the ETF builder
See what the bond sleeve actually does to weighted volatility, drawdown, and yield.
Compare
Read the best bond ETF page
Use the shortlist page when you are down to a small number of broad ballast options.
Drawdown
See the drawdown lens
Bond sleeves make more sense when they are tied back to a spending plan rather than viewed in isolation.
Duration explained, with a worked example
Duration is the number that tells you how much a bond ETF's price is likely to move when interest rates change. It is measured in years, and it is the most important single figure on a bond fund's factsheet.
The working rule professionals use: for each 1 percentage point change in market interest rates, a bond fund's price moves by roughly its duration, in the opposite direction. Put concretely:
- A fund with a duration of about 7 years would be expected to fall by roughly 7% if rates rose by 1%, and rise by roughly 7% if rates fell by 1%.
- A 2-year-duration short-dated fund would move only about 2% for the same 1% rate shift.
- A 15-year-duration long fund could move around 15% — a genuinely equity-like swing from a single rate move.
This is an approximation. The real relationship curves slightly (a refinement called convexity), and yields rarely move in tidy 1% steps. But as a way to size up risk before you buy, it is exactly the right instinct: a higher-duration fund is not “better” or “worse”, it is simply more sensitive. That sensitivity cuts both ways — it is painful when rates rise and rewarding when they fall, which is why long-duration bonds often rally hardest in a recession when central banks are cutting.
Bond ETFs are usually grouped into short (roughly 1–3 years), intermediate (around 5–7 years) and long (10 years and beyond) duration. Checking which band a fund sits in tells you more about how it will behave than the yield does.
Credit quality: not all bonds are equally safe
Duration is about interest-rate risk. Credit quality is the second axis: how likely the borrower is to keep paying. The two risks are different, and a single fund can carry both.
| Type | What it is | Behaviour to expect |
|---|---|---|
| Government bonds (e.g. gilts) | Debt issued by a sovereign such as the UK government. | Highest credit quality of the three; main risk is interest-rate/duration risk, not default. Tends to hold up or rally in a crisis. |
| Investment-grade corporate | Bonds from financially sound companies, higher-rated. | A modest yield premium over government bonds for taking some default risk; generally well-behaved but can wobble in stress. |
| High-yield (“junk”) | Bonds from lower-rated, riskier borrowers. | Higher yield, but the price can behave more like equities — falling alongside shares in a downturn, exactly when you may want ballast. |
The practical implication: if the job of your bond sleeve is to be ballast — the steady part that cushions equity falls — high-yield bonds may not do that job, because they tend to fall when shares fall. Government and investment-grade bonds are the more traditional diversifiers. A broad “global aggregate” fund blends government and investment-grade debt across many countries, which is why it is a common default for a diversified ballast sleeve.
Currency hedging: why GBP-hedged matters for bonds
For a UK investor, a global bond fund priced in dollars or euros carries an extra, hidden risk: the exchange rate. And for bonds specifically, that currency swing can be larger than the bond returns themselves.
Here is the key insight. Bonds are a relatively low-return, low-volatility asset; currency moves are not. If you hold an unhedged global bond fund, a 10% move in the pound against the dollar can swamp a whole year of carefully earned coupon income — the very stability you bought bonds for gets drowned out by foreign-exchange noise. That is why a GBP-hedged share class (often labelled “GBP Hedged” or “£ Hedged”) is so commonly recommended for the bond portion of a UK portfolio: the hedge strips out the currency swing so the fund behaves like the bonds it actually holds.
Important nuance: hedging is usually considered more important for bonds than for global equities. With shares, the long-term return is large enough that many UK investors leave currency unhedged. With bonds, the return is smaller and steadier, so leaving the currency exposed can defeat the point of holding them. Hedging has a small ongoing cost, but for a ballast sleeve it often buys exactly the predictability you wanted.
Matching duration to your time horizon
The cleanest way to choose duration is to tie it to when you need the money. A long-duration fund used for short-term money is a mismatch; so is ultra-short cash for a 20-year goal where you are giving up yield for stability you do not need.
Short horizon
1–3 years
Short-duration or money-market style funds. You want minimal price movement because you cannot wait out a bad year.
Medium horizon
3–10 years
Intermediate-duration funds are a common middle ground — enough yield to matter, without the violent swings of long duration.
Long horizon
10+ years
Longer duration can suit very long-term goals or those who specifically want the sleeve to rally when rates are cut — provided you can stomach the interim swings.
This is general education rather than a recommendation. The right duration, credit mix and hedging choice depend on the job you have given the bond sleeve and your own time horizon — not on which fund happens to show the highest yield this month.
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