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That can't be right. Vanguard lists the bonds that are in the ETF.

• tripletao 8y ago
  It is right. Most bond ETFs (and some stock ETFs) buy only a statistical sample of the index, not the whole thing. It usually works fine. > For bond index ETFs, the sheer number of issues in their target indexes and the illiquid nature of many of these issues make full replication of the benchmarks prohibitive. Instead, most bond index ETFs replicate their benchmarks through a sampling approach. > Managers create samples that aim to match the fundamental characteristics of the bond indexes across such areas as: [...] https://advisors.vanguard.com/VGApp/iip/site/advisor/etfcenter/article/ETF_HowETFIndexed https://advisors.vanguard.com/VGApp/iip/site/advisor/etfcent...
  • acover 8y ago
    Ah, I agree with what you said. My question was about how closely it tracks an index but the underlying value of the bonds it holds. The article raises the possibility that illiquidity could cause the price of the ETF diverge from the bonds it holds.
    • tripletao 8y ago
      In fairness, that answer didn't directly address your question. The sampling approach helps a little with that liquidity issue, since the manager probably chooses a disproportionately liquid sample. But I don't see why people worry about divergence between the price of an ETF and the price of its illiquid holdings. The illiquidity is fundamentally there, and it's just a question of whether you expose it to the customer (like an ETF) or conceal it using stale prices, estimated prices, etc. (like a mutual fund).
      • acover 8y ago
        The article explains one issue is that the investors in bond ETFs have an unrealistic expectation of liquidity. When the ETF becomes illiquid and is dropping quickly, the conservative bond investor may rush to sell and cause the ETF drop significantly in price despite the underlying bonds still being sound.