8 Best Bond Funds for Retirement

Bond funds can minimize risk and provide income.

As investors approach retirement, their objective usually begins to shift from growth to preservation of capital and income. Therefore, keeping volatility and drawdowns to a minimum can help investors retire on time with a sufficiently large portfolio. To smooth out fluctuations, many investors rely on bond funds, which can hold a variety of fixed-income assets such as Treasurys, corporate bonds and Treasury inflation-protected securities, or TIPS. Historically, an allocation to high-quality fixed-income assets has helped improve a portfolio’s risk-adjusted returns and provide income. Although 2022 was a bad year for bonds due to rising interest rates, bonds are now entering 2023 with much higher yields, which bodes well for their long-term expected returns. Here are the eight best bond mutual funds and exchange-traded funds to buy for retirement.

iShares Core U.S. Aggregate Bond ETF (ticker: AGG)

Fixed-income analysts will often refer to the Bloomberg US Aggregate Bond Index, or “Agg,” as the benchmark for overall U.S. bond market performance. To invest in this index, investors can buy the highly popular AGG ETF, which currently sports over $80 billion in assets under management. AGG holds a highly diversified portfolio of over 10,000 bond issues. The underlying bonds include Treasury bonds, agency bonds, mortgage-backed securities and investment-grade corporate bonds of various maturities. Currently, AGG has an intermediate duration of 6.4 years, meaning that if rates rose by 1%, AGG would fall by 6.4%. The ETF has an average yield to maturity of 4.25%, which is the theoretical return an investor could expect if they held all of its underlying bonds to maturity. AGG charges a low expense ratio of 0.03%.

iShares Core Total USD Bond Market ETF (IUSB)

While popular, AGG doesn’t technically hold the total U.S. bond market. Notably, AGG excludes non-investment grade bonds, also known as high-yield or “junk” bonds. To capture the total U.S. bond market that includes those bonds, investors can buy IUSB. This ETF is essentially AGG but with approximately 5% allocated to non-investment grade bonds. In terms of metrics, IUSB has slightly lower interest rate sensitivity, with a duration of 6.2 years and a slightly higher average yield to maturity of 4.61%. It is slightly more expensive than AGG, with a 0.06% expense ratio. Because IUSB tracks a different index, the Bloomberg U.S. Universal Index, but has historically similar performance, it could be a good tax-loss-harvesting partner for AGG.

Vanguard Total Bond Market Index Fund Admiral Shares (VBTLX)

Investors who prefer their bond holding in mutual fund form can opt for VBTLX, which tracks the Spliced Bloomberg U.S. Aggregate Float Adjusted Index. With more than 10,000 underlying securities, this fund offers highly diversified exposure to U.S. investment grade bonds. Similar to the previous ETFs, this fund has an intermediate duration of 6.5 years and an average yield to maturity of 4.6%. Sixty-seven percent of the fund is held in AAA-rated U.S. government Treasurys and agency bonds, with 14% in BBB-rated investment grade corporate bonds. To purchase VBTLX, investors need to fork over a minimum investment of $3,000. The fund charges an expense ratio of 0.05%.

Fidelity U.S. Bond Index Fund (FXNAX)

Mutual fund pricing gets more competitive by the day, with firms scrambling to lower expense ratios in an attempt to undercut their competitors. A great example is FXNAX, which is similar to VBTLX in that it also tracks the Bloomberg U.S. Aggregate Bond Index, but costs half as much with a 0.025% expense ratio. The fund charges no transaction fees and has no minimum investment requirement. It also has a long track record, having been in operation since March 1990. Investors who like Fidelity’s lineup of funds can use FXNAX as a core, low-cost building block in a retirement portfolio.

Vanguard Tax-Exempt Bond Index Fund Admiral Shares (VTEAX)

Income from bond funds isn’t taxed too favorably, so a good practice is to hold them in a tax-sheltered account like a Roth IRA, 401(k) or health savings account. For those investing in a taxable brokerage account, an efficient alternative is a fund like VTEAX, which holds municipal bonds exempt from federal income taxes. All else being equal, municipal bonds tend to produce higher net returns than equivalent bonds in a taxable account. The fund holds high-quality bonds, with 21% holding an AAA rating and 55% holding an AA rating. With a duration of 5.9 years and an average yield to maturity of 3.5%, VTEAX strikes a sweet spot between interest rate risk and returns. As with VBTLX, VTEAX requires a minimum $3,000 investment. The fund charges a 0.09% expense ratio.

iShares U.S. Treasury Bond ETF (GOVT)

All bonds have credit risk, which refers to the likelihood of the issuer of the bond defaulting on interest payments or the principal investment. The greater the credit risk, the higher the yield tends to be. This is why corporate bonds tend to pay more but lose value during a market crash. For greater safety, investors can buy ETFs like GOVT, which only hold U.S.-government-issued Treasurys. Historically, Treasurys have been a “flight to safety” asset during numerous crashes such as 2008 and March 2020. With GOVT, investors get exposure to Treasurys of all maturities, with an average duration of 6.2 years and an average yield to maturity of 3.9%. The ETF costs a 0.05% expense ratio.


One of the biggest risks a retiree can face is inflation. A sudden surge in the price of goods and services can cause the cash flows from a retiree’s portfolio to become insufficient. A way to mitigate this is via an allocation to TIPS. The prices of these government-issued bonds, and thus their payments, are tied to the consumer price index. If inflation spikes suddenly, TIPS can gain value and pay increased income. To access a broad portfolio of TIPS, investors can buy SCHP, which has a duration of 6.8 years, an average yield to maturity of 4% and an expense ratio of 0.04%. TIPS ETFs like SCHP can be a great lower-risk substitute for more volatile inflation-fighting assets like commodities funds.

SPDR Bloomberg 1-3 Month T-Bill ETF (BIL)

Many of the bond funds profiled earlier have intermediate durations. When interest rates rise sharply, as they did in 2022, these funds can lose value. For retirees, this can be risky, especially if equities fall at the same time. To lower this risk, investors can pair the previously mentioned bond funds with an ultra-short-term Treasury ETF like BIL. This ETF tracks the Bloomberg 1-3 Month U.S. Treasury Bill Index, which provides a combination of very low interest rate and credit risk. In 2022, BIL ended the year in the green with a 1.4% gain thanks to these characteristics. The ETF costs an expense ratio of 0.135% and is extremely liquid, with a low bid-ask spread and high daily trading volume.

8 best bond funds for retirement:

— iShares Core U.S. Aggregate Bond ETF (AGG)

— iShares Core Total USD Bond Market ETF (IUSB)

— Vanguard Total Bond Market Index Fund Admiral Shares (VBTLX)

— Fidelity U.S. Bond Index Fund (FXNAX)

— Vanguard Tax-Exempt Bond Index Fund Admiral Shares (VTEAX)

— iShares U.S. Treasury Bond ETF (GOVT)

— Schwab US TIPS ETF (SCHP)<

— SPDR Bloomberg 1-3 Month T-Bill ETF (BIL)

More from U.S. News

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8 Best Bond Funds for Retirement originally appeared on usnews.com

Update 01/23/23: This story was previously published at an earlier date and has been updated with new information.

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