The short version
- A bond is a loan to a government or company that pays interest and repays the loan on a set date. Gilts are UK government bonds.
- Bond prices fall when interest rates rise. Duration tells you roughly how far: a fund with a duration of seven years would lose about 7% if yields rose by one percentage point.
- That's what happened in 2022. An index of UK gilts lost 23.8% over the year as interest rates climbed.
- A bond ETF never matures. Unlike a single bond held to the end, there's no date when you're sure to get a fixed sum back.
Part of ETF basics. New to ETFs? Start with what an ETF is and how it works.
- −23.8%return of an index of UK conventional gilts in 2022
- 130bprise in the 30-year gilt yield (1.3 percentage points) in three days of trading, September 2022
- 6.97years: the effective duration of one large UK gilt ETF in September 2026
What bonds and gilts are
A bond is a loan. You lend money to a government or company, it pays you interest, called the coupon, and it repays the loan on a set date. iShares puts it simply: bonds are a form of debt.
A gilt is a bond issued by the UK government. The Debt Management Office (DMO) describes it as a sterling liability of the government, issued by HM Treasury and listed on the London Stock Exchange.
A conventional gilt pays a fixed coupon every six months, then repays your money when it matures. The DMO notes that the British government has never failed to make interest or principal payments on gilts when due.
Companies issue corporate bonds in the same way. A bond ETF holds many bonds at once. One large UK gilt ETF, used here as an example only, had 71 holdings in September 2026.
Yield: what you earn
Yield is the return a bond pays relative to its price. Yields move in the opposite direction to prices: when bond prices fall, yields rise, and the other way round.
Here’s why. Say a gilt pays £4 a year for each £100. If new gilts start paying £5, nobody will pay £100 for yours. Its price falls until the £4 is a competitive return on what a buyer pays.
Bond ETF factsheets often show two yields. The 12-month trailing yield is the income the fund paid over the past year, as a share of its price. The yield to maturity estimates what the bonds would return if held to the end at today’s prices, before fees.
For the gilt ETF above in September 2026, those figures were 4.55% (trailing) and 5.18% (yield to worst, a cautious version of yield to maturity).
Duration: how much prices move when rates change
Duration measures how sensitive a bond’s price is to interest rates. The iShares factsheet puts it plainly: the longer the duration, the more sensitive the fund, so a duration of ten years is twice as volatile as five.
A handy rule of thumb comes from PIMCO. A bond with a five-year duration would lose about 5% of its value if rates rose by one percentage point.
The gilt ETF above had an effective duration of 6.97 years. So a one-point rise in yields would knock roughly 7% off its value, before any income. A fall in yields would push it up by a similar amount.
2022: the year gilts fell
A gilt's payments have always been made. Its price is another matter.
In 2022 the Bank of England raised Bank Rate from 0.25% to 3.5%. Vanguard describes how rapid rate rises by central banks that year triggered unprecedented declines in bond markets.
Gilts were no exception. The FTSE Actuaries UK Conventional Gilts All Stocks Index returned −23.83% in 2022, according to the factsheet of an ETF that tracks it.
Then came late September. After the government’s fiscal statement of 23 September, the yield on 30-year gilts rose by 1.3 percentage points in three days of trading. The Bank of England called it a move three times larger than any other over a similar period.
The rise exposed weaknesses in liability-driven investment (LDI) funds, which are large holders of gilts. The Bank stepped in, buying £19.3 billion of gilts between 28 September and 14 October 2022.
Here’s how I’d think about it. Gilts protect you from default, not from price swings, and the longer the duration, the bigger the swings can be. Duration is the number that warns you.
Credit risk: governments and companies
Credit risk is the chance that a borrower doesn’t pay interest or repay the loan when due.
Rating agencies grade bonds. Investment grade means BBB or higher. High yield means BB+ or lower: higher credit risk, so investors are usually offered higher yields. That’s why corporate bonds tend to yield more than government bonds. The extra is compensation for the chance of not being repaid.
Corporate bonds can also be harder to trade in a panic. In March 2020, some large corporate bond ETFs traded more than 5% below the value of their holdings, the Bank of England found. How ETFs work behind the scenes explains why.
Inflation-linked bonds
Index-linked gilts adjust both their coupons and the amount repaid in line with the Retail Prices Index (RPI), with a lag. They make up a minority of gilts in issue.
Inflation protection isn’t protection from rising interest rates. The KIID for one inflation-linked bond ETF lists changes to interest rates among its main risks. In the 2022 turmoil, £7.2 billion of the Bank of England’s purchases were index-linked gilts.
A bond ETF isn't a bond you hold to the end
Buy a single conventional gilt and hold it to maturity, and you know the cash you’ll get: the coupons, then your money back on a fixed date.
A standard bond ETF has no end date. It continuously replaces maturing bonds with new ones. So there’s no day when its price is pulled back to a fixed amount.
That rolling has an upside. When yields rise, the fund buys new bonds that pay more. Vanguard points out that higher starting yields mean more income from bonds issued today.
Some providers also offer fixed-term bond ETFs. These hold bonds maturing in the same year and close on a planned date, returning the capital. Their value still moves in the meantime, and returns aren’t guaranteed.
Currency hedging
A fund of foreign bonds adds currency risk. A UK investor in US government bonds gains if the dollar strengthens against the pound and loses if it weakens.
Hedged share classes aim to reduce this. The KIID for one sterling-hedged bond ETF says it uses FX forward contracts, agreements to swap currencies at a set rate, to reduce the effect of exchange rates. It adds that the hedge may not completely remove currency risk.
A gilt fund holds sterling bonds, so a UK investor has no currency risk to hedge.
Common questions
- Are gilt ETFs risk-free?
- No. The UK government has always paid what it owes on gilts, but a gilt fund’s price can fall sharply, as it did in 2022.
- Do bond ETFs pay income?
- Distributing ones pay it out; the gilt ETF above distributes twice a year. Accumulating ones reinvest it. See accumulating vs distributing ETFs.
- Is a bond ETF like a savings account?
- No. Its value goes up and down, and the FSCS doesn’t cover poor investment performance. Cash ISA vs stocks and shares ISA compares the two.
- Can I hold bond ETFs in an ISA?
- Many can be held in a stocks and shares ISA or a SIPP. The gilt ETF above lists both as eligible. Check each fund’s factsheet.
This page explains how bond ETFs work. The funds mentioned are examples only, not recommendations, and nothing here is advice about what you should buy. Investments can fall as well as rise, and you may get back less than you put in. Read the full disclaimer.
Sources
- What are bonds? A complete guide to bonds, iShares (BlackRock)
- About gilts, UK Debt Management Office
- iShares Core UK Gilts UCITS ETF factsheet, September 2026, BlackRock
- Bonds 102: the importance of duration in bond investing, PIMCO
- Official Bank Rate history, Bank of England
- How interest rate moves drive bond returns, Vanguard UK, February 2026
- Financial stability buy/sell tools: a gilt market case study, Bank of England Quarterly Bulletin, November 2023
- Interim Financial Stability Report, May 2020, Bank of England
- iShares $ TIPS UCITS ETF GBP Hedged (Acc): Key Investor Information, BlackRock
- Fixed-term bond ETFs: investing for a specific date, iShares (BlackRock)
- Investments, Financial Services Compensation Scheme
Facts checked 13 October 2026.