What Is Duration on a Bond ETF?

A bond is a stream of fixed payments. If newly issued bonds start paying more, the older bond paying less has to get cheaper for a buyer to accept it. Duration measures how far the price has to fall to make that adjustment, and it grows with how far into the future those fixed payments extend.

The working approximation is simple enough to do in your head. Price change is roughly equal to duration multiplied by the change in yield, with the sign flipped. Rates up 1%, a 6 year duration fund down about 6%. Rates down 1%, that same fund up about 6%. The relationship is not perfectly linear at large rate moves, a refinement called convexity, but for the moves most retirees care about the linear approximation is close enough to make decisions with.

Duration is not maturity. Maturity is simply when the last payment arrives. Duration is a weighted average of when all the cash flows arrive, so a bond paying high coupons has a shorter duration than a zero coupon bond of the same maturity, because more of its value comes back to you sooner. For a bond ETF, the number to look for on the fact sheet is effective duration, which accounts for features like call provisions and mortgage prepayment.

Typical effective durations by category are worth committing to memory. Ultra short and money market: under 1 year. Short term bond funds: about 2 to 3 years. Intermediate core and total bond market funds: about 6 years. Long term corporate: about 12 to 14 years. Long term Treasury: about 16 to 18 years. TIPS funds vary widely, from about 2 years for short TIPS to 20 or more for long TIPS.

Duration cuts both ways, and this is the part people forget after a bad year. The same 17 year duration that produced a 29% loss in 2022 would produce a roughly 17% gain if rates fell 1%. Long duration bonds are the strongest ballast against a recessionary equity crash precisely because they are the most rate sensitive. The trade is that they are the worst holding in an inflation shock. You are choosing which risk you want to be exposed to, not eliminating risk.

There is a second, more reassuring fact about duration. If you hold a bond fund longer than its duration and keep reinvesting the distributions, the higher yields you now earn eventually offset the price loss you took. Duration is approximately the break even horizon for a one time rate shock. A six year duration fund that dropped 13% in 2022 is not a permanent 13% loss for someone whose money was going to sit there for a decade. It was a permanent loss for someone who sold in 2022.

Look up the effective duration of every bond fund you own. It is on the fund's fact sheet and on any major fund research page. If you own three bond funds and cannot state their durations, you do not know your interest rate exposure.

Match duration to your spending horizon, not to a target allocation percentage. Money you will spend in the next 24 months belongs in something with a duration close to zero. Money that backstops spending 10 years out can tolerate meaningful duration. A single blended bond fund forces one compromise across both jobs.

Run the stress test yourself before you need it. Take your bond balance, multiply by the duration, and that is roughly what a 1% rate move does in dollars. A $700,000 bond allocation at a 6 year duration moves about $42,000 on a 1% rate change. Decide now whether that number is tolerable.

If you are using bonds specifically to hedge an equity crash rather than to fund withdrawals, longer duration Treasuries do that job better than an intermediate blend. If you are using bonds to fund the next three years of spending, they do it worse. Be clear about which job you are hiring the holding for.

Duration decisions have a tax dimension that most people ignore. Bond interest is taxed as ordinary income, so where you hold duration matters as much as how much you hold. For a household in a high bracket doing Roth conversions, pushing taxable bond income into a tax deferred account can be worth more than any duration tweak.

• Treating all bond funds as interchangeable safe money without checking duration.
• Confusing average maturity with duration, which understates the rate sensitivity of low coupon bonds.
• Holding long duration bonds for near term spending needs because they had the highest yield on the screen.
• Selling a bond fund inside its duration window after a rate shock, which converts a temporary price decline into a permanent loss and forfeits the higher reinvestment yield.
• Ignoring credit risk because you focused only on duration. A high yield bond fund can have a short duration and still lose heavily in a recession.
• Holding the highest yielding bond funds in a taxable brokerage account while holding tax efficient equity index funds in the IRA, which is asset location backwards.