The following is my answer to a Quora question: “What is the difference between a bond mutual fund versus a bond ETF, and which is a better investment?”
A bond fund, also known as a debt fund, is simply a fund that invests in bonds, or other debt securities. Bond ETFs are simply exchange-traded funds that invest exclusively in bonds. They are like bond mutual funds because they hold a portfolio of debt instruments.
Bond funds have a pool of capital, raised from investors. The fund manager allocates the capital to various securities. In contrast, a bond ETF tracks an index of bonds in order to match the returns from the underlying index. Bond funds may buy from the issuer, over the counter, or from an exchange. ETFs, as their name suggests, buy exclusively from an exchange.
A bond fund is not superior or inferior to a bond ETF. They may invest in the same category of assets, but there are fundamentally different, to serve different investor needs. People put money in a bond fund because they want their investment to be actively managed. Bond funds offer more such options. However, if you have a high volume of movement, then an ETF is better because it works through an exchange,
Bond ETFs are also more transparent, since you can see the holdings at any time. For a bond fund, you will likely have to wait for the fund report to be released. However, a bond fund works better for someone with a lower risk profile since there is always a secondary market for the fund. You can sell the fund back to the fund issuer. In the case of an ETF, you can only sell it on the market, and if there is no buyer, you are stuck with it.