Contrast the ways an investor can take on passive exposure to bond markets

Full replication buys every bond in the index; it is rarely feasible given index size and illiquidity. Enhanced indexing by matching primary risk factors holds a smaller set of bonds that reproduces duration, key rate profile, sector and credit mix; it cuts cost. Pooled vehicles, such as bond mutual funds and ETFs, give instant diversification and daily or intraday liquidity, though an ETF's price can move well away from its net asset value in stressed markets. Derivatives, such as total return swaps on the index or interest rate and bond futures, provide exposure quickly without holding bonds, but bring counterparty risk, financing cost and roll. The choice depends on portfolio size, cost, need for customisation and liquidity requirements.