How do you calculate the potential range of returns on bond ETFs? With a plain old bond, I know I will make say, 3% in a year if I hold the bond. But with the ETF it’s really unclear to me. Can my return be negative/unbounded-below due to interest rate risk (not considering bonds defaulting)? If so, then that seems to make bond ETFs less appealing because my profit is less certain?
Suppose I have a toy example of a bond ETF X containing 1/3 bonds A, B, C each.
Q1. Does the bond ETF X pay out the coupons from each of A, B and C to me? Hence that’s one source of my profit from holding X?
Q2. Since X is traded on the market, I’m susceptible to price fluctuation risk in X (for example due to changing government interest rates, or even just supply-demand of X). But my potential profit should still be lower bounded somehow by the principal that’s paid back when A, B, C expire and the face value I paid for X?
Q3. The point of asking Q1 and Q2 is I want to know, at the time of purchasing X, after e.g 1 year of holding X, what will be my range of possible profit? E.g. 2.5% to 3.5%? Or – 10% to +10%?
Assume no issuer defaults/fails to pay back principals on the bonds in the ETF.
This seems like a complicated calculation, I’d really appreciate links to resources understanding this!
