Bond Funds vs Individual Bonds: Where the Crossover Falls

Key takeaways

• A Treasury note repays face value on a fixed date. The iShares 7-10 Year Treasury Bond ETF held 13 notes at 30 June 2026, sells each one before it matures, and has no repayment date at all.
• Priced on the 236 basis point rise in the 10-year Treasury yield between 31 December 2021 and 30 December 2022, the fund's value overtakes the bondholder's at 8.26 years, close to the fund's 6.95-year effective duration.
• Mark the note to market and that lead disappears. The 10-year note falls to 80.74 per 100 against the fund's 83.60, because its 9.35-year Macaulay duration is the longer of the two.
• Buying one gilt through the DMO's own service costs 0.7% with a £12.50 minimum charge, so a £1,000 purchase pays 1.25% before it earns anything.
• Corporate bond trades of $100,000 par value or less ran an effective spread of 46.6 basis points from January 2023 to June 2024, against 21.2 for blocks of $1,000,000 and over.

The bond matures and the fund doesn't. Neither fact tells you what you earned.

You've probably been told that individual bonds are safer than bond funds, because a bond gives you your money back and a fund never does. The first half of that is true. The second half doesn't follow from it.

Hold a Treasury note to the end and, in TreasuryDirect's words, "If you still own the bond after 20 years or the note after seven years, you get back the face value of the security." FINRA describes the same event: "On a bond's maturity date, the borrower fulfills its debt obligation by paying bond holders the final interest payment and the bond's face value, called par value." No rate move touches that number.

The UK contract reads the same. The DMO's own private investor guide, whose fourth edition dates from December 2004, describes a conventional gilt in one line: "On maturity the holder receives the final coupon payment and the nominal capital amount invested."

A fund makes no such promise, because it has no such date. What it has instead is a rolling reinvestment. Every coupon it collects, and every bond it sells on, goes back to work at whatever yields are on offer that day. After rates rise, that's a higher yield applied to the whole portfolio, for as long as you hold it.

Both effects are real and they pull in opposite directions. So the useful question isn't which one wins. It's when. Priced on the move in the 10-year Treasury yield through 2022, the fund catches the bondholder at 8.26 years, and the honest version of that comparison is even less flattering to the bond.

A 7-10 year Treasury fund owns 13 notes and sells every one before maturity

The mechanism sits on the factsheet rather than in the marketing. The iShares 7-10 Year Treasury Bond ETF "seeks to track an index that includes U.S. Treasury bonds with remaining maturities between seven and ten years." A note that drops below seven years to run stops qualifying. The fund sells it and buys a longer one.

As at 30 June 2026 the fund held 13 positions, with a weighted average maturity of 8.45 years and an effective duration of 6.95 years. Those two numbers barely move from year to year, and that's the design working. An individual note's duration falls every day you own it and reaches zero at maturity. A fund's doesn't.

UK gilt funds are built the same way. The iShares Core UK Gilts UCITS ETF tracks an all-stocks conventional gilt index. Its June 2026 factsheet shows 70 holdings, an average weighted maturity of 10.45 years, an effective duration of 7.21 years and a yield to worst of 4.63%.

Duration is the lever that decides how hard a rate move lands on either instrument. If that number is unfamiliar, our guide to what a 1% rate move actually costs derives it and shows where the rule of thumb breaks down. Here it's an input rather than the subject.

Price both paths on the 236 basis point move the 10-year yield made in 2022

A real shock beats a round one. The US Treasury's daily par yield curve put the 10-year at 1.52% on 31 December 2021 and at 3.88% on 30 December 2022. That's a rise of 236 basis points.

Two people each put 100 to work at the start, and rates jump on day one. Compressing a year of repricing into a single instant is a simplification, and it flatters neither side.

The bondholder buys a 10-year note at par with a 1.52% coupon. They hold it to maturity and collect 100 back. Their coupons get reinvested at the new 3.88%, because that's what the market now pays. Terminal value: 100 + 1.52 × 11.9395 = 118.15, where 11.9395 is the ten-year accumulation factor for coupons reinvested at 3.88%.

The fund holder takes the price hit at once. At 6.95 years of effective duration, 236 basis points costs 6.95 × 2.36 = 16.40% of net asset value, leaving 83.60. The portfolio then earns the new 3.88%. Compounded for ten years, 83.60 becomes 122.33.

At the note's maturity the fund is 4.18 ahead per 100 invested. That's 2.04% a year against the bondholder's 1.68%. And note the row the argument usually skips: had rates never moved, the bondholder would have finished on 116.28. The rise they were told to fear left them 1.87 better off.

The crossover lands at 8.26 years, near where duration says it should

Solve for the year the two paths meet and the answer is 8.26. Both sides come to 114.46. Before that point the bondholder is ahead; after it, the fund is.

The chart plots the difference column. It closes at roughly 4 points of the original 100 every four years, so a year of impatience is worth about a point.

Move the assumptions around and the answer barely shifts. Lock the bondholder's coupons at the original 1.52% instead of reinvesting them higher, and the crossover falls to 7.80 years. Use the fund's actual 2022 loss of 15.23% rather than the 16.40% the duration rule predicts, and it falls to 7.57 years. All three sit inside a year and a half of the stated 6.95-year duration.

That's what duration is, said out loud. It's the horizon at which the capital loss from a rate rise and the extra income from reinvesting at the new rate cancel each other out. Below it, a rate rise has cost the holder money. Above it, the same rise has made them money.

Mark the note to market and the bondholder's lead disappears entirely

There's a cheat buried in that table, and it belongs to the bondholder. Their column counts principal at 100 the whole way through. That's not a price anyone could realise before the maturity date. It's an accounting convention the holder applies to themselves.

Price the note the way a market prices it and the ordering inverts. A 1.52% coupon note with ten years to run, discounted at 3.88%, is worth 80.74. The fund is worth 83.60. The bondholder is behind on day one and stays behind at every horizon: 3.08 behind at year two, 3.59 at year six, 4.18 at year ten.

Duration explains it again. That 10-year note carried a Macaulay duration of 9.35 years, meaning the average time to its cash flows, weighted by their present value. The fund's effective duration was 6.95 years. The single bond was the more rate-sensitive of the two, not the safer one.

Vanguard's own comparison reaches the same place from a different direction: "Holding an individual bond to maturity primarily provides an emotional rather than economic benefit."

What the par promise buys is a date, not a return

Here's the strongest objection to everything above, and it survives.

If you know you need a specific sum on a specific date, an individual bond delivers it and no fund can. The note pays 100 at maturity whatever yields do in between. A fund's value on any given future date is unknown in advance. For someone funding school fees, a tax bill, or the first two years of retirement, that certainty is the whole product.

Vanguard states the general case: "Bond prices, to be competitive, adjust to changing interest rates so that total returns will be equal from that point forward." Equal returns from here is exactly why the maturity date buys timing certainty rather than extra money.

Which points at the real distinction, and it isn't fund against bond. It's whether the ladder rolls. A ladder you rebuild each year, buying a new long bond as the short one matures, is a bond fund you operate yourself: the same rolling duration, the same absence of a terminal date, higher costs. A ladder built to end on the dates you need cash is a genuinely different instrument, and the comparison above doesn't apply to it.

Buying one gilt through the DMO's own service costs 0.7%, with a £12.50 floor

Costs are where the self-run version leaks, and the UK's cheapest retail channel makes the size problem visible.

The DMO's Gilt Purchase and Sale Service publishes a commission scale, and the first row reads "Purchase costs up to £5,000 0.7% £12.50" — a 0.7% commission with a £12.50 minimum charge. On a £1,000 purchase the minimum is what bites. £12.50 on £1,000 is 1.25%, paid before the gilt earns anything at all.

The percentage rate only takes over above £1,785.71, which is £12.50 divided by 0.007. Past £5,000 the scale changes to "£35 plus 0.375% of the amount in excess of £5,000", so a £10,000 purchase costs £53.75, or 0.54%.

Set that against a fund's running cost. The gilt ETF's total expense ratio is 0.07% a year; the Treasury ETF's is 0.15%. A one-off 1.25% on a small gilt purchase is 17.86 years of the gilt ETF's fee, and a sale before maturity draws commission again. Our breakdown of every layer of what a fund costs covers the other side of that ledger.

The service is execution-only in the strict sense. In the DMO's words, "You are not able to specify the price or a maximum price at which your purchases of gilts are to be made." Settlement normally falls three business days after the form is accepted.

Odd-lot corporate trades ran 46.6 basis points of spread against 21.2 for blocks

Gilts are the easy case. Corporate bonds are where retail size gets charged for, and the MSRB has measured how much.

Its March 2025 study covered corporate, agency and municipal trades from January 2023 to June 2024. The effective spread on corporate bond trades of $100,000 par value or less came to 46.6 basis points. For blocks of $1,000,000 and over it was 21.2. The 25.4 basis point gap between them is what dealing in retail size costs.

Municipal bonds were harsher still: 56.1 basis points for odd lots against 17.6 for blocks. Across all trades the MSRB put the average effective spread at 53 basis points for municipals, 36 for corporates and 40 for agency securities. And the exposure is not niche. In that window, 71.7% of corporate bond trades were $100,000 or less.

FINRA's confirmation rule makes the charge visible rather than absent. For a retail corporate or agency trade, the confirmation has to carry "the member's mark-up or mark-down for the transaction" expressed as "a total dollar amount and as a percentage of the prevailing market price". Disclosure isn't a discount.

Minimum denominations decide what a small portfolio can hold at all

Government bonds are the accessible end. TreasuryDirect sells notes with a "Minimum purchase $100", in $100 increments, maturing in "2, 3, 5, 7, or 10 years". Agency bonds are a step up: FINRA notes they are "sold in a variety of increments, generally requiring a minimum initial investment of $10,000."

Corporate bonds have been the hard case in the UK, partly as a regulatory artefact. The FCA's policy statement PS25/9, published in July 2025, describes the regime it replaced: the UK Prospectus Regulation "requires more disclosure in prospectuses for issuances of non-equity securities with a denomination per unit below €100,000 (defined by the rules as retail securities)". Issuers had an incentive to price above that line. The FCA removed the dual standard, and the new rules came into force on 19 January 2026.

Denomination and diversification are the same constraint seen twice. Vanguard's comparison puts the credit half plainly: "a portfolio that consists of only 10 or 20 individual bonds still exposes clients to a greater degree of issuer-specific risk." At €100,000 a bond, ten issuers is a €1,000,000 portfolio. Below that, a retail corporate bond holding is a concentrated credit position wearing the word "bond".

What this model leaves out, and what would move the crossover

Three limitations, stated plainly.

The model holds yields flat after the shock. Real curves keep moving, and a fund that has taken one loss can take another. IGLT returned -4.20% a year over the five years to 30 June 2026, a cumulative -19.31%, which turns £10,000 into £8,069. Its calendar-year record runs -5.21% in 2021, -23.83% in 2022 and -3.34% in 2024. Crossover arithmetic describes one shock. It does not tell you whether a second one is coming.

The model is also nominal throughout. Par is a nominal promise, and 100 returned in ten years buys whatever prices then allow. That is the gap index-linked bonds are built to close, at the cost of a different set of risks.

And it prices government bonds, where default isn't the live question. For corporate credit the fund's diversification is doing work this comparison never measures, and a single 2026 sample of factsheet durations is not a general law about funds.

What would move the crossover materially is a change in duration, not a change in the promise. Put a two-year note against a long gilt fund and the ordering flips, because the shorter instrument absorbs less of the hit. So the number worth checking on any factsheet is effective duration against your own horizon. Where the fund's duration is longer than the date you need the money, the mismatch is the risk — and the missing maturity date is a symptom of it rather than the cause.