How to compare bond ETFs by duration and hedging

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 what the metrics mean (volatility, beta, tracking error): ETF metrics glossary

Research snapshot

The three questions that matter

Practical routes

Best next pages

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.

A common rule of thumb: 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.

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 sterling-hedged share classes (usually labelled “GBP Hedged”) are widely used for the bond part of UK portfolios: the hedge aims to strip out most of the currency swing, so the fund behaves more like the bonds it holds. The share class name says which currency it is hedged to. AGBP is the sterling-hedged class of the iShares Core Global Aggregate Bond UCITS ETF, while AGGU is the same fund hedged to US dollars, which does not remove the pound’s moves against the dollar.

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.

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.