Don’t overlook bond investments despite today’s volatile rate environment.
The Federal Reserve raised interest rates in March for the first time since 2018, and as a result many investors have been mighty worried about their bond funds. That’s because bonds typically have an inverse relationship to interest rates — so when rates rise, bonds fall. But regardless of the broader dynamics and short-term headwinds in fixed income markets, it’s important to remember that a diversified portfolio that includes bonds is the best way to provide stable and consistent returns in the long run. So if you’re wondering where to put your money in the bond market right now, here are nine top bond exchange-traded funds that should deliver reliable income in the years ahead — regardless of tighter monetary policy in 2022.
iShares iBoxx Investment Grade Corporate Bond ETF (ticker: LQD)
With 2,500 high-quality bonds from top names including CVS Health Corp. (CVS) and Goldman Sachs Group Inc. (GS), the LQD ETF is a logical starting point for fixed-income investors — and with nearly $35 billion in assets, it’s a popular one, too. Although the holdings are deep, the bias of this ETF is toward banking stocks, with roughly 24% of the portfolio in this sector. That’s worth noting, but it’s not uncommon for many investment-grade bond funds, as financial companies are among the most frequent users of the bond market to raise capital.
Current yield: 3.4%
SPDR Portfolio Short Term Corporate Bond ETF (SPSB)
Of course, with uncertainty around interest rates as well as geopolitical risk thanks to the war in Ukraine, some investors may be more concerned with protecting their capital than generating income. An alternative corporate bond ETF with a lower risk profile thanks to a lower “duration” is the SPSB fund, which holds $7.5 billion in assets. Its holdings have shorter time horizons, limited to debt that matures in three years or less from firms like aerospace giant Boeing Co. (BA) and leading bank HSBC Holdings PLC (HSBC). A lot can happen to even these currently stable companies in 10 or 20 years, but investors can be very confident that these short-term bonds will be paid back in full. There’s less interest on these loans, but they offer more certainty.
Current yield: 2.3%
iShares 1-3 Year Treasury Bond ETF (SHY)
If you really want to decrease risk in your fixed-income portfolio, then look to this short-term bond fund that is one of the best Treasury ETFs out there and boasts about $22 billion in assets at present. Not only is the U.S. government the most bulletproof borrower out there, the fact that these bonds mature in three years or less means it’s pretty much a sure thing that you’re going to get paid. On the flip side, that also means there’s not much of a risk premium here, so the yield is more modest and is roughly on par with the typical S&P 500 dividend stock. Fixed-income portfolios are as much about capital preservation and certainty as they are about generating a regular payday, however, and SHY is certain to see less volatility than stocks even as it offers a high certainty of payouts.
Current yield: 1.5%
iShares 20+ Year Treasury Bond ETF (TLT)
Another low-risk way to play the U.S. Treasury bond market that can tap into slightly higher yield is to lengthen your duration to the very long term. Remember, the American government is considered the most solid investment on the planet — if Uncle Sam isn’t around in 20 years, you likely have more problems than this individual bond fund to worry about! And since the durations of this bond ETF’s holdings are all 20 years or longer, it can command a higher premium on the loans. There is, of course, more chance of interest rate changes disrupting this fund along that timeline if the Fed continues to tighten policy. But with a yield almost a full percentage point higher than the prior short-term Treasury fund, this bond ETF could be worth a look.
Current yield: 2.4%
Vanguard Intermediate-Term Corporate Bond ETF (VCIT)
This “Goldilocks” bond fund splits the difference between short and long durations to maximize yield without taking on too much risk. And though the name implies that the fund holds only corporate debt, VCIT also offers limited exposure to Treasurys, with about 1% of the portfolio in government bonds at present. This is in addition to some 2,000 bonds from top-ranking companies like Bank of America Corp. (BAC) and Verizon Corp. (VZ). This $48 billion fund is one of the largest ETFs of any flavor on Wall Street thanks to its unique balance, so investors can buy and hold with confidence.
Current yield: 3.3%
SPDR Bloomberg High Yield Bond ETF (JNK)
Now we get to the high-yielding bond funds for those with a greater risk tolerance. The flip side of low yield and low risk is higher-yield bonds with higher risk. As one of the go-to vehicles for high-yield or junk bonds, JNK commands about $6 billion in total assets focused on bonds from companies with less-than-stellar credit. There’s more risk in these businesses that include embattled cruise operator Carnival Corp. (CCL) and aircraft parts manufacturer TransDigm Group Inc. (TDG). But the bonds offer a higher rate of return as a result. JNK is an attractive investment if you are willing to be more aggressive in your hunt for fixed income. It’s also worth noting the fund does its best to mitigate potential default losses through wide diversification among more than 1,300 holdings.
Current yield: 5.7%
Pimco 0-5 Year High Yield Corporate Bond ETF (HYS)
This Pimco fund is a way to split the difference and go for the higher return of junk bonds combined with the lower risk profile inherent to shorter maturities. HYS is built with high-yield corporate loans but only those that come due in five years or less. The fees here are a bit higher than your typical index fund at 0.55%, or $55 annually on every $10,000 invested. This is one area where a good manager can make a big difference, however, and Pimco has one of the biggest names in fixed-income investing and has a history of earning its keep. The fact that this fund yields more than three times the S&P 500 right now is proof that its manager knows how to find generous yielding bonds, too.
Current yield: 4.7%
Vanguard Total International Bond ETF (BNDX)
If you’re not content limiting yourself to domestic bonds, then consider this Vanguard ETF that layers in investment-grade bonds from all over the world instead of just the U.S. market. From foreign governments to overseas banks and telecom stocks, you’ll get a wide array of issuers across the more than 6,500 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 and the fact that rates in Europe and Japan are much lower in general than in the U.S., bond investors don’t get paid much. Still, the geographic diversification this $94 billion bond ETF offers may make it worth your time.
Current yield: 1.1%
iShares Core U.S. Aggregate Bond ETF (AGG)
If you can’t decide how to balance yield and risk, consider AGG — one of the largest ETFs on Wall Street and one of the most popular fixed-income options with roughly $85 billion in total assets. This fund offers broad exposure to U.S. investment-grade bonds, including Treasury bonds, agency mortgage debt from government-backed entities like Fannie Mae and Freddie Mac, and corporate bonds from highly rated firms like Bank of America. There is built-in diversification and a focus on lower risk. AGG also offers a scale and liquidity that appeals to investors, and they regularly trade north of 9 million shares of this fund per day.
Current yield: 2.3%
9 of the best bond ETFs to buy now:
— iShares iBoxx Investment Grade Corporate Bond ETF (LQD)
— SPDR Portfolio Short Term Corporate Bond ETF (SPSB)
— iShares 1-3 Year Treasury Bond ETF (SHY)
— iShares 20+ Year Treasury Bond ETF (TLT)
— Vanguard Intermediate-Term Corporate Bond ETF (VCIT)
— SPDR Bloomberg High Yield Bond ETF (JNK)
— Pimco 0-5 Year High Yield Corporate Bond ETF (HYS)
— Vanguard Total International Bond ETF (BNDX)
— iShares Core U.S. Aggregate Bond ETF (AGG)
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Update 03/24/22: This story was published at an earlier date and has been updated with new information.