Coming up with a list of the best bond ETFs to buy now may at first seem like it would include only funds that can perform well in an inflationary, rising-rate environment. But this would only be partially correct.
True, we've seen a ton of volatility in the stock market this year and increasing talk of a global recession, driven by both rising borrowing costs and rising commodity prices thanks to inflation. This has worked well for investors holding Treasury inflation-protected securities (TIPS) or ultra-short-term bonds in their portfolios, but with the most recent consumer price index (CPI) report showing inflation moderated in July, the time may be limited on these ideas.
Thankfully, bond ETFs cover a variety of strategies. So, it's a good idea to not only focus on the best investments for today's still-high inflationary environment, but also consider what the best investments could be down the road.
"We still think high-quality bonds play a pivotal role in portfolios as they have shown to be the best diversifier to equity risk," says Lawrence Gillum, fixed-income strategist at independent broker-dealer LPL Financial. "While we expect further gains for stocks through year-end, unforeseen events happen. And it's best to have that portfolio protection in place before it's needed."
For investors seeking out portfolio protection via the fixed-income market, here are the 10 best bond ETFs to buy now. The names featured here cover a variety of strategies, and given the tough year the bond market has faced, it could be a good time to dollar-cost average into bond funds that can perform well in the remainder of 2022 and beyond.
Data is as of Aug. 17. SEC yields reflect the interest earned after deducting fund expenses for the most recent 30-day period and are a standard measure for bond and preferred-stock funds.
iShares Core U.S. Aggregate Bond ETF
- Fund category: Intermediate core bond
- Assets under management: $83.4 billion
- SEC yield: 3.1%
- Expenses: 0.03%, or $3 annually for every $10,000 invested
If you're looking for the best bond ETFs, then your first stop should be the iShares Core U.S. Aggregate Bond ETF (AGG (opens in new tab), $102.49). It's the largest exchange-traded bond fund out there and one of the top 10 ETFs of any flavor as measured by total assets under management.
As an "aggregate" bond fund, this ETF offers exposure to all elements of fixed-income markets. AGG has 10,000 holdings across many different corners of the investment-grade bond market, including both government and corporate bonds.
Right now, about 41% of the AGG portfolio is in U.S. Treasury bonds. Another 24% or so is in "agency" mortgage debt backed by entities like the Federal National Mortgage Association, more commonly referred to as Fannie Mae. The rest includes top-tier corporate bonds from firms like JPMorgan Chase (JPM (opens in new tab)) and Bank of America (BAC (opens in new tab)).
With a net annual expense of just 0.03%, or $3 on every $10,000 invested, this iShares fund is a very affordable and diversified ETF that is a good starting point for bond market investors.
Learn more about AGG at the iShares provider site. (opens in new tab)
iShares 20+ Year Treasury Bond ETF
- Fund category: Long government
- Assets under management: $25.0 billion
- SEC yield: 3.1%
- Expenses: 0.15%
If you're primarily interested in the stability offered by government bonds, the iShares 20+ Year Treasury Bond ETF (TLT (opens in new tab), $114.72) is an attractive option that offers a direct play on long-term U.S. Treasury bonds – specifically, those with remaining maturity of at least 20 years and with $300 million or more of outstanding face value – without any corporate debt exposure.
America's government bonds are popular around the globe because of the strength and stability of our economy. These assets are often seen to be as good as cash, as the world will have much bigger problems if the U.S. somehow suffers so badly that it defaults on its government debt. And with recent increases in interest rates, these bonds are now offering a significantly higher yield than they were just one or two years ago.
It's worth noting, however, that a continued uptrend in rates does carry interest-rate risk for TLT. The duration of this bond ETF's holdings are all 20 years or longer, and as rates have moved higher, that naturally devalues the older positions that don't offer as much of a payday.
However, with the iShares 20+ Year Treasury Bond ETF down about 22% in the last year a lot of that negativity is now priced in. And with a yield that is almost two times that of the S&P 500 Index right now, there are a lot of reason to have TLT on this list of best bond ETFs.
Learn more about TLT at the iShares provider site. (opens in new tab)
Vanguard Long-Term Corporate Bond ETF
- Fund category: Long-term bond
- Assets under management: $4.7 billion
- SEC yield: 4.8%
- Expenses: 0.04%
The Vanguard Long-Term Corporate Bond ETF (VCLT (opens in new tab), $83.50) is one of the best bond ETFs for investors looking primarily at corporate markets for income. VCLT offers a bigger payday than the prior funds thanks to a focus wholly on corporate lending. This is because the added risk that comes with corporate bonds naturally translates to higher yield, particularly when the uncertainty of long-term loans enters the mix.
To be clear, VCLT is focused on only investment-grade debt, with half the bonds in the portfolio rated at BBB and the other half rated A or better. These are companies like investment giant Goldman Sachs (GS (opens in new tab)), mega-brewer Anheuser-Busch InBev (BUD (opens in new tab)) and telecom AT&T (T (opens in new tab)). However, the average duration of the 2,600 or so bonds in this portfolio is longer than 13 years – and as we learned in the financial crisis of 2008 and again during the pandemic of 2020, a "sure thing" company can sometimes hit an unexpected snag years down the road.
That risk is offset with a big boost in yield, which is more than three times that of the S&P 500 at present.
Learn more about VCLT at the Vanguard provider site. (opens in new tab)
Vanguard Short-Term Corporate Bond ETF
- Fund category: Short-term bond
- Assets under management: $44.0 billion
- SEC yield: 3.9%
- Expenses: 0.04%
If you like the fact that corporate bonds generally offer better yield than Treasuries but you're looking to dial back the risk a little bit, the Vanguard Short-Term Corporate Bond ETF (VCSH (opens in new tab), $76.76) could be a good compromise.
VCSH has a similar makeup to the prior fund except its portfolio of bonds has an average maturity of under three years. That means investors can have a lot more certainty that those debts will be repaid in full, since fewer things can go south in a smaller window of time.
And once again, these are "investment grade" companies that have solid credit ratings. The 2,200 or so total bonds in the portfolio right now include debt offerings from firms like aerospace giant Boeing (BA (opens in new tab)), megabank JPMorgan Chase and Big Tech mainstay Microsoft (MSFT (opens in new tab)).
The result is a fund that yields better than one with just government bond ETFs. Not only that, but VCSH offers a lower risk profile than the long-dated corporate bond funds that might have slightly higher paydays, but also a lot more uncertainty because of the time element.
Learn more about VCSH at the Vanguard provider site. (opens in new tab)
Vanguard Total International Bond ETF
- Fund category: Global bond-USD hedged
- Assets under management: $46.0 billion
- SEC yield: 2.0%
- Expenses: 0.07%
We've discussed a few all-domestic funds so far, but one of the last core bond ETFs worth pointing out is the Vanguard Total International Bond ETF (BNDX (opens in new tab), $50.59). This is an "ex-U.S." fund, meaning it purposefully excludes American-based debt offerings from its portfolio and instead, is built with 7,000 or so bonds from around the world.
BNDX offers investors exposure to government and corporate bonds that are all "investment grade," and with the vast majority of its assets in developed markets. Top countries at present are Japan (17%), France (12%) and Germany (11%), and roughly 3% of the portfolio includes U.S. bonds. There's also a handful of emerging market debts, but at only 6% of the portfolio, it is not significant enough to make this international bond ETF overly risky.
It's natural to gravitate towards domestic options in your portfolio, as U.S. markets are the most dominant in the world. However, at $44 billion in assets this global bond ETF is definitely worth a look. And at just 0.07% in annual expenses, or $7 per year on every $10,000 invested, it offers you effective geographic diversification for a very small cost.
Learn more about BNDX at the Vanguard provider site. (opens in new tab)
iShares TIPS Bond ETF
- Fund category: Inflation-protected bond
- Assets under management: $29.7 billion
- SEC yield: 14.8%
- Expenses: 0.19%
The bond funds featured up until this point are all good foundational investments that offer rather vanilla takes on the fixed-income market. The iShares TIPS Bond ETF (TIP (opens in new tab), $115.05) takes a more tactical approach.
This exchange-traded fund is composed solely of Treasury Inflation-Protected Securities, or TIPS. This special class of bond has a direct tie to the rate of inflation as measured by the consumer price index. And considering this measure of inflation rose at a red-hot annual rate of 9.1% in June and 8.5% in July, you can easily understand the power of connecting your bonds to this index of inflation.
Thanks to rising inflation and the adjustment to the payout of TIPS, the current yield of this fund is now around 15%. This is significantly higher than what it was just a few years ago.
Of course, if price pressures abate in the years ahead then these inflation-linked bonds and the related TIP ETF could also roll back. But considering the current economic outlook, it seems pretty safe to bet on high inflation sticking around for a bit.
Learn more about TIP at the iShares provider site. (opens in new tab)
iShares Floating Rate Bond ETF
- Fund category: Ultrashort bond
- Assets under management: $9.3 billion
- SEC yield: 2.1%
- Expenses: 0.15%
The iShares Floating Rate Bond ETF (FLOT (opens in new tab), $50.32) is an interesting bet for investors who are depending on rising interest rates in the months and years ahead. As the name implies, this exchange-traded fund gives investors access to debt offerings that are not tied to a fixed-interest rate, but instead see rates change depending on the current environment.
U.S. floating-rate bonds carry higher risk than fixed-rate bonds, as there is the possibility that borrowers don't fully anticipate the potential for rising costs. However, FLOT looks to mitigate this by focusing only on short-term loans. Right now, the weighted average maturity of bonds in the ETF's portfolio is less than two years.
The rising interest-rate environment is creating a significant short-term tailwind to yield on this fund. And this might get lost in the current headline yield of just 1.9%. However, widening the scope to include the last 12 months' worth of distributions, the yield was just 0.6% – so payouts have more than tripled in short order. Furthermore, the average yield to maturity of the current portfolio is 3.5% based on the most recent additions.
As with TIPS, rates can move the other way and end up causing trouble for FLOT investors. However, the recent trends toward higher rates and higher yields in this bond fund are a good sign.
Learn more about FLOT at the iShares provider site. (opens in new tab)
iShares iBoxx $ High Yield Corporate Bond ETF
- Fund category: High-yield bond
- Assets under management: $15.4 billion
- SEC yield: 6.7%
- Expenses: 0.48%
One way to tap into higher yields in the bond market is to stake out a position in "junk" bonds that get low marks from credit rating agencies. The healthy yield associated with these bonds comes from the higher risk offered in this asset class, but if you're willing to stomach a bit more volatility then a fund like the iShares iBoxx $ High Yield Corporate Bond ETF (HYG (opens in new tab), $77.62) could be worth a look.
With over $15 billion in assets, this iShares fund is the most popular ETF to play junk bonds. It is diversified across more than 1,200 holdings. These include some corporations that have well-known challenges right now such as struggling carrier American Airlines (AAL (opens in new tab)) and cash-strapped telecom T-Mobile (TMUS (opens in new tab)) that took on a huge debt load to finance its 2020 merger with Sprint.
If you are worried about the economy entering recession or if you think higher rates will increase the cost of borrowing to companies, then you might want to skip a fund like HYG. But if you think the diversification will smooth out any bumps in the road or that the economy has brighter days ahead, then this could be one of the best bond funds to deliver big-time income.
Learn more about HYG at the iShares provider site. (opens in new tab)
iShares National Muni Bond ETF
- Fund category: Muni national intermediate
- Assets under management: $28.7 billion
- SEC yield: 2.5%
- Expenses: 0.07%
Another interesting corner of the bond market that is attractive to some investors is municipal bonds, or munis for short. These are debt offerings from local governments to fund state highways or city water main improvements.
The reason munis are interesting is that they are generally seen as higher risk. This is because there have been a handful of local municipalities that mismanaged their way into bond defaults. However, history shows that this is still incredibly rare. To be specific, analysts at Nuveen estimate that in the first half of 2022, first-time municipal bond defaults were just $582 million – a rounding error in what is a $4 trillion market, and a fraction of corporate bond defaults.
The iShares National Muni Bond ETF (MUB (opens in new tab), $107.31) is the most popular way to play municipal bonds. The fund's massive portfolio is built out of nearly 5,300 municipal bonds from New York to California and everything in between. And for some investors, knowing their cash is going into local projects instead of big businesses or the general D.C. slush fund gives them a little more satisfaction.
Investors seeking out the best bond ETFs should definitely keep MUB on their radar.
Learn more about MUB at the iShares provider site. (opens in new tab)
Fidelity Total Bond ETF
- Fund category: Intermediate core-plus bond
- Assets under management: $2.3 billion
- SEC yield: 3.8%
- Expenses: 0.36%
If you're not particularly interested in building your own portfolio of bond ETFs based on the flavor of the month, a one-stop fund like the Fidelity Total Bond ETF (FBND (opens in new tab), $47.51) might be worth a look. This is an actively managed ETF that holds a little bit of everything, and changes allocations based on what the folks in charge see as the best opportunity.
Fidelity has a great reputation for actively managed bond funds. Even though this specific offering was launched in 2014 and is among the smaller bond ETFs on this list as measured by assets, it is built on a strategy with staying power – namely, the Fidelity Total Bond Fund (FTBFX (opens in new tab)), its sister mutual fund that has been delivering yield to investors since 2002 and currently commands over $30 billion in assets.
FBND has about 32% of its portfolio in Treasuries, 40% in corporates and about 16% in mortgage-backed securities. It is also heavily weighted toward the U.S., with about 87% of its assets here and only a handful of foreign investments at present.
Actively managed funds are admittedly more expensive, but with a net expense ratio of 0.36%, or just $36 annually on $10,000 invested, you're only paying $30 or $40 more per year on that amount than low-cost index funds, not hundreds of dollars more. For those who want expert guidance or the peace of mind that comes from a "set it and forget it" approach, FBND might be worth a look.
Jeff Reeves has covered finance and capital markets since 2008, contributing to outlets including CNBC, the Fox Business Network, the Wall Street Journal digital network, USA Today, US News & World Report and CNN Money.
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