Historically, bonds have always acted as a kind of ballast for portfolios. During market crashes like those in 2008 and March 2020, bonds, especially high-quality ones like U.S. government Treasurys, soared in a “flight to safety.”
This was due to the Federal Reserve slashing interest rates and implementing quantitative easing, which boosted the price of fixed-income assets. Although this changed in 2022 when interest rates rose sharply and caused bonds to sell off alongside equities, 2023 might be shaping up to be a better year for bonds.
Ongoing rate hikes from the Fed have pushed bond yields higher, boosting the attractiveness of bonds. This shift has not been lost on investors. About two-thirds of all net inflows into exchange-traded funds, or ETFs, in the first quarter went to fixed-income funds, according to financial services firm VettaFi.
ETFs are a popular choice in part because they are a low-cost way of getting around the lack of liquidity and complication of buying individual bond issues. Here are the nine best bond ETFs to buy right now:
| Bond ETF | 30-Day SEC Yield |
| Vanguard Total Bond Market ETF (ticker: BND) | 4% |
| iShares Core US Aggregate Bond ETF (AGG) | 3.8% |
| US Treasury 2 Year Note ETF (UTWO) | 4% |
| iShares U.S. Treasury Bond ETF (GOVT) | 3.8% |
| iShares iBoxx $ Investment Grade Corporate Bond ETF (LQD) | 5% |
| SPDR Bloomberg High Yield Bond ETF (JNK) | 8% |
| Schwab US TIPS ETF (SCHP) | 7.9% |
| SPDR Bloomberg 1-3 Month T-Bill ETF (BIL) | 4.6% |
| Vanguard Tax-Exempt Bond ETF (VTEB) | 3.2% |
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Vanguard Total Bond Market ETF (BND)
A popular low-cost, buy-and-hold fund for long-term investors is BND, which offers broad exposure to the U.S. bond market. By tracking the Spliced Bloomberg U.S. Aggregate Float Adjusted Index, BND provides access to over 10,000 government, agency and investment-grade corporate bonds.
The ETF currently provides a weighted-average yield to maturity — or the interest an investor earns when holding the bond until it matures — of 4.3%, along with an intermediate average duration of 6.6 years. Should interest rates rise by 1 percentage point, BND can be expected to lose 6.6% in value, all else being equal. The opposite will occur if rates are cut. Bond price and yield move inversely: When one goes up, the other goes down.
BND’s most notable feature is its low expense ratio of 0.03%, or about $3 annually per $10,000 investment.
iShares Core US Aggregate Bond ETF (AGG)
A popular alternative to BND is AGG. This ETF tracks the Bloomberg US Aggregate Bond Index, which is often used as the benchmark of U.S. bond market performance. AGG is very popular and liquid, possessing high assets under management, or AUM, of $89 billion along with a 30-day average volume of over 5 million shares.
The ETF is similar to BND, also holding over 10,000 government, agency and investment-grade corporate bonds. AGG has a yield to maturity of 4.3% and a duration of 6.3 years. It also charges a low expense ratio of 0.03%.
[READ: 7 of the Best Fidelity Bond Funds.]
The US Treasury 2 Year Note ETF (UTWO)
UTWO is a single-bond ETF, a unique and new type of investment product. As its name suggests, UTWO’s sole portfolio holding consists of the current U.S. two-year Treasury note.
This stands in contrast to other bond ETFs, which hold a ladder of different issuers and maturities. For investors and traders looking to target a specific yield-curve play, UTWO offers more precise exposure than most bond ETFs.
UTWO’s ETF structure also allows investors to gain Treasury exposure in a transparent and liquid way without buying directly on government websites. UTWO currently charges a 0.15% expense ratio and has attracted $343.7 million in AUM.
iShares U.S. Treasury Bond ETF (GOVT)
The flight to safety effect noted at the start of this article tends to be most pronounced for U.S. Treasurys. This is due to their much lower credit risk when compared to corporate bonds. Virtually all Treasurys are rated AAA by S&P Global, signifying that they have a low probability of default.
Investors who buy Treasurys are banking on the assumption that the U.S. government will always make good on its debts, which has historically been the case. A great way of accessing a broad portfolio of Treasurys is via GOVT, which currently has a yield to maturity of 3.8% along with a 6.2-year duration. GOVT costs a 0.05% expense ratio.
iShares iBoxx $ Investment Grade Corporate Bond ETF (LQD)
On the other hand, investors who don’t mind taking on higher credit risk in exchange for stronger yields can opt for ETFs that hold investment-grade corporate bonds. These are bonds issued by companies.
To be considered investment grade, the bonds must have credit ratings of at least BBB from Standard & Poor’s. LQD tracks over 2,600 corporate bonds in one investment. Compared to GOVT, LQD has a higher yield to maturity and duration of 5.1% and 8.5 years, respectively. A quarter of its bonds come from companies in the banking sector, and 45.9% of the fund’s holdings are rated BBB, while 44.6% are rated A. LQD charges a 0.14% expense ratio.
[The Case for Corporate Bonds in 2023]
SPDR Bloomberg High Yield Bond ETF (JNK)
Investors willing to take on even more credit risk for the highest possible yields can opt for below-investment-grade bonds rated lower than BBB. These are called high-yield, or junk, bonds.
Compared to Treasurys and investment-grade corporate bonds, high-yield bonds tend to be more correlated with the stock market and sensitive to its movements. Their higher credit risk implies a higher risk of default, but investors willing to take on that risk tend to be rewarded with higher yields on average.
A case in point is JNK, which despite having a short duration of 3.7 years pays a high yield to maturity of 8.6%. JNK currently charges a 0.4% expense ratio.
Schwab US TIPS ETF (SCHP)
One of the main weaknesses of bond ETFs is inflation. When goods and services prices soar, central banks tend to respond with interest rate hikes, which negatively affect bond prices.
Treasury inflation-protected securities, or TIPS, are a type of bond somewhat resistant to these conditions as their prices and coupon payments are indexed to the consumer price index. While they’re not immune, TIPS can offer greater protection than bonds if inflation suddenly spikes.
To access a portfolio of broad TIPS, investors can buy SCHP, which has a duration of 6.9 years and a yield to maturity of 3.7%. SCHP charges a 0.04% expense ratio.
SPDR Bloomberg 1-3 Month T-Bill ETF (BIL)
The safest type of bond is the U.S. Treasury bill, or T-bill. These are ultrashort fixed-income securities issued by the U.S. government with maturities of a year or less. As a result, they carry low interest rates and minimal default risk.
To access T-bills, investors can buy BIL, which tracks the Bloomberg 1-3 Month U.S. Treasury Bill Index. BIL has a short duration, which insulates it from interest rate movements. Thanks to the current inverted yield curve, Treasurys with shorter maturities are yielding more than longer-dated ones. Case in point: BIL currently pays a yield to maturity of 5.3%, higher than longer-duration Treasury ETFs like GOVT. BIL charges a 0.14% expense ratio.
Vanguard Tax-Exempt Bond ETF (VTEB)
Investors in a higher income tax bracket may find most bond ETFs to be tax inefficient when held outside of a tax-advantaged account like a Roth IRA. Municipal bonds, which are issued by local governments to fund infrastructure projects like bridges, roads and waterworks, offer a potential solution.
The income from these bonds is exempted from federal and state taxes in certain circumstances. With VTEB, investors can access over 7,000 municipal bonds from across the U.S. This ETF has a high credit rating, with 20.8% in AAA and 56.8% in AA-rated municipal bonds. Currently, VTEB sports an average duration of 5.5 years, a yield to maturity of 3.2% and an expense ratio of 0.05%.
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9 of the Best Bond ETFs to Buy in 2023 originally appeared on usnews.com
Update 05/09/23: This story was previously published at an earlier date and has been updated with new information.
