Fixed-income investments can reduce volatility.
Despite all the talk about a rising interest rate environment in recent months, the much-followed 10-year U.S. Treasury bond is yielding just 1.3% or so. That’s down significantly from more than 1.7% earlier in 2021 and not that far off from pre-pandemic levels. While that payout may not sound like a lot, the typical dividend stock in the S&P 500 is yielding about 1.3%, too — and comes with a lot more risk. So if you’re looking for income but don’t want to suffer the volatility of stocks, bonds are still your best bet. Here are nine ways to play this asset class via exchange-traded funds.
iShares Core U.S. Aggregate Bond ETF (ticker: AGG)
The largest bond ETF out there, AGG boasts $89 billion in assets and is the simplest way to gain exposure to this asset class in one low-cost fund. It’s made up of nearly 10,000 individual bond holdings to represent broad exposure to U.S. investment-grade issues, including Treasury bonds and top-tier corporate debt from firms like JPMorganChase & Co. (JPM). And with an annual expense ratio of just 0.04%, or $4 on every $10,000 invested, AGG is an affordable one-stop shop for bond exposure.
Current yield: 1.26%
Vanguard Intermediate-Term Corporate Bond ETF (VCIT)
For those looking for a bit more yield than an aggregate bond fund that is heavily weighted toward low-risk (and thus low-yield) government bonds, VCIT offers a way to focus only on corporate bonds. These debts are all from top-ranking companies, however, so you won’t find any “junk bonds” here, only firms like Bank of America Corp. (BAC), Allstate Corp. (ALL), UnitedHealth Group Inc. (UNH) and other blue-chip stocks in good standing. This $46 billion fund is one of the largest ETFs of any flavor on Wall Street, so investors can buy and hold with confidence.
Current yield: 1.87%
Vanguard Short-Term Corporate Bond ETF (VCSH)
If you’re a little more risk-averse, VCSH offers you a good way to split the difference. With a focus on high-quality corporate debt, but with the typical bond in the portfolio maturing in just three years, investors can have a lot more certainty that those debts will be repaid in full. The yield is less than the typical S&P 500 dividend stock, but the stability you get in this short-term-bond fund is likely to be much higher than the volatility you’re likely to experience in stock market. This rock-solid fund has $41 billion in assets, proving that it’s a core holding for many risk-averse investors.
Current yield: 0.84%
iShares 20+ Year Treasury Bond ETF (TLT)
Another low-risk way to play the bond market that can tap into slightly higher yield is to overlook the many different issuers out there and instead focus on what could be considered the most solid investment on the planet — the U.S. government. After all, America not only has the leading economy in the world, but it also has the power to tax freely if and when deficits or federal debts become a structural concern. The durations of this bond ETF’s holdings are all 20 years or longer, but even longevity like that shouldn’t be a concern. After all, we all will have much bigger things to worry about than TLT if the U.S. Treasury isn’t around in a decade or two.
Current yield: 1.77%
Vanguard Total International Bond ETF (BNDX)
If you’re really risk-averse, then consider this Vanguard bond fund that layers in investment-grade bonds from all over the world instead of just the U.S. market. From foreign governments to European utility companies to Japanese transportation firms, you’ll get a wide array of issuers across the more than 6,000 holdings. If you’re looking for a long-term bond holding, BNDX is worth a look. But be aware that because of the very low risk profile of its holdings, bond investors aren’t paid much of a premium and distributions are among the lowest on this list.
Current yield: 0.4%
iShares TIPS Bond ETF (TIP)
There’s a lot of talk about inflation in 2021, so there’s also a lot of talk about TIPS, or Treasury inflation-protected securities. These securities are issued by the U.S. government and indexed to inflation to protect investors from a decline in purchasing power. Simply put: As inflation rises, TIPS adjust their principal value in kind. The iShares TIPS Bond ETF is invested solely in this asset class — and thanks to recent trends, the yield has surged. But keep in mind that if inflation does not materialize as expected, TIPS could underperform other potential investments.
Current yield: 8.37%
Vanguard Mortgage-Backed Securities ETF (VMBS)
Another tactical bet on the bond market is this Vanguard fund focused solely on mortgage-backed securities. That is, VMBS invests primarily in U.S. mortgage agency debt securities issued by Ginnie Mae, Fannie Mae and Freddie Mac. The result is a decent yield that’s higher than conventional Treasury bonds but comes with the backing of the U.S. government all the same. Of course, that doesn’t make these securities risk-free. If you remember the financial crisis of 2008, you’ll recall that so-called “agency” mortgages saw plenty of pain as Fannie and Freddie required nearly $200 billion in bailouts. All the same, if you believe in the mortgage market, you can grab a slightly higher yield than in Treasury bonds alone via VMBS.
Current yield: 1.02%
iShares iBoxx $ High Yield Corporate Bond ETF (HYG)
Speaking of higher yield, no list of bond ETFs would be complete without a junk bond fund that allows investors to reap higher yield in exchange for the higher risk profile of the issuers. HYG is the largest and most liquid junk bond fund out there, with net assets of nearly $20 billion. It’s diversified across 1,300 or so holdings, but those debt holdings all face plenty of specific challenges, from struggling legacy automaker Ford Motor Co. (F) to second-tier telecom T-Mobile US Inc. (TMUS) to hospital operator Tenet Healthcare Corp. (THC). If you are either bullish on the recovering U.S. economy or simply don’t mind a bit more risk in exchange for a bit more reward, HYG offers more than double the yield of the typical investment-grade bond fund. Just remember that yield may not be generous enough to offset deep declines if things go south.
Current yield: 3.37%
Pimco Active Bond ETF (BOND)
Last but not least among the best bond ETFs is this actively managed bond fund from investment giant Pimco, designed not with a specific index or strategy in mind but instead following whatever trends the experts see. Right now, the fund is pretty evenly split between corporate bonds and government bonds. The fund is also heavily invested in top-tier borrowers, with roughly half of all assets in AAA-rated bond offerings. However, the nearly 1,200 bonds in this portfolio aren’t limited to category or geography, and you’ll find a smattering of high-quality bonds from as far away as Brazil as the managers seek out opportunities. If you want a more tactical fund that moves with the market rather than one that stays in its lane, BOND could be worth a look.
Current yield: 1.6%
Nine of the best bond ETFs to buy now:
— iShares Core U.S. Aggregate Bond ETF (AGG)
— Vanguard Intermediate-Term Corporate Bond ETF (VCIT)
— Vanguard Short-Term Corporate Bond ETF (VCSH)
— iShares 20+ Year Treasury Bond ETF (TLT)
— Vanguard Total International Bond ETF (BNDX)
— iShares TIPS Bond ETF (TIP)
— Vanguard Mortgage-Backed Securities ETF (VMBS)
— iShares iBoxx $ High Yield Corporate Bond ETF (HYG)
— Pimco Active Bond ETF (BOND)
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Update 08/11/21: This story was published at an earlier date and has been updated with new information.