In an investment landscape often dominated by the allure of high-flying stocks, bonds have quietly but consistently been the bedrock for risk-averse investors looking to lower portfolio volatility and limit drawdowns.
The calming influence of bonds has become so ingrained in portfolio management that it gave birth to the “60/40” rule — a portfolio composed of 60% stocks and 40% bonds — as a gold standard for a diversified, long-term investment.
This strategy has delivered an attractive risk-adjusted return in most years, except those characterized by rising interest rates and high inflation, such as the unpredictable market witnessed throughout 2022.
However, investing in bonds is often less straightforward than one might imagine. Unlike stocks, which are traded on centralized exchanges, bonds usually trade over the counter.
This system can prove daunting for the average investor, who might find themselves submerged in an alphabet soup of complex bond mechanics like yield to maturity, duration and convexity.
The need to decipher these terms and understand how they affect the bond’s behavior and pricing makes the entry barrier for bond investing too high for many investors.
Thankfully, the financial world has a solution to this conundrum: bond exchange-traded funds, or ETFs. These financial instruments, available at many investment firms, offer exposure to a basket of different bonds, governed by a set of underlying rules.
“Bond ETFs invest primarily in fixed-income securities such as government bonds, corporate bonds, municipal bonds and other debt instruments,” says Wes Moss, managing partner and chief investment strategist at Capital Investment Advisors. “These funds are popular among retail investors because they offer diversification, professional management and the potential for income generation.”
The result is an investment vehicle that brings the accessibility and convenience of stock market investing to the world of bonds. Bond ETFs stand out for their transparency, liquidity and low fees, making them an ideal choice for investors looking to add some stability to their portfolios.
Here are nine of the best bond ETFs to buy in 2023:
|Bond ETF||Expense ratio||30-day SEC yield|
|iShares Core U.S. Aggregate Bond ETF (ticker: AGG)||0.03%||4.4%|
|Vanguard Total Bond Market ETF (BND)||0.03%||4.6%|
|iShares U.S. Treasury Bond ETF (GOVT)||0.05%||4.6%|
|iShares iBoxx $ Investment Grade Corporate Bond ETF (LQD)||0.14%||5.6%|
|Schwab Short-Term U.S. Treasury ETF (SCHO)||0.03%||5%|
|SPDR Portfolio Intermediate Term Treasury ETF (SPTI)||0.03%||4.3%|
|Vanguard Long-Term Treasury ETF (VGLT)||0.04%||4.5%|
|iShares iBonds Dec 2025 Term Corporate ETF (IBDQ)||0.1%||5.7%|
|Vanguard Total International Bond ETF (BNDX)||0.07%||3.3%|
iShares Core U.S. Aggregate Bond ETF (AGG)
One of the most popular bond benchmarks is the Bloomberg U.S. Aggregate Bond Index, also known as the “Agg.” This bond index is intended to track the exposure of the broad U.S. investment-grade bond market, composed of both corporate and government-issued bonds.
However, investors can’t invest directly in an index in most cases. To circumvent this, iShares offers AGG, which as its name suggests tracks the Bloomberg U.S. Aggregate Bond Index. For a 0.03% expense ratio, investors gain exposure to over 11,000 U.S. bonds of various maturities.
Vanguard Total Bond Market ETF (BND)
AGG isn’t the only option investors have for broad U.S. bond market exposure. Vanguard, a major competitor to BlackRock iShares, offers BND. Charging a 0.03% expense ratio, BND also comes in a mutual fund variant as the Vanguard Total Bond Market Index Fund Admiral Shares (VBTLX).
“BND provides diversified exposure to various sectors and maturities within the bond market by tracking the performance of the Bloomberg Barclays U.S. Aggregate Float Adjusted Index,” says Michael Ashley Schulman, partner and chief investment officer at Running Point Capital.
iShares U.S. Treasury Bond ETF (GOVT)
“Often overlooked in bond ETFs is liquidity — the ability to buy or sell the security quickly, easily and without a large spread,” says Daniel Dusina, director of investments at Blue Chip Partners. “A bond ETF’s liquidity, for the most part, is driven by the liquidity of its underlying securities.”
When it comes to liquidity in bonds, few can rival U.S. government-issued Treasurys, which are highly traded and always in demand. For access to the broad Treasury market, iShares offers GOVT, which tracks the ICE U.S. Treasury Core Bond Index and has a 0.05% expense ratio.
iShares iBoxx $ Investment Grade Corporate Bond ETF (LQD)
Investors should always pay attention to an ETF’s bid/ask spread, which is the difference between the highest price a buyer is willing to pay and the lowest price a seller is willing to accept.
“The bid/ask spread can still be narrow for an ETF with low trading volume if it invests in liquid markets, such as investment-grade corporate debt or U.S. Treasury bonds,” Dusina says. “This is important to be aware of when choosing bond ETFs, as a large spread can equate to a worse initial purchase price.”
An ETF that accounts for this is LQD, which tracks the Markit iBoxx USD Liquid Investment Grade Index. The ETF focuses on investment-grade corporate bonds with above-average liquidity, thus keeping its 30-day median bid/ask spread low at 0.01%. The ETF charges a 0.14% expense ratio.
Schwab Short-Term U.S. Treasury ETF (SCHO)
“Short-term bond ETFs typically invest in bonds with maturities of less than three years, making them less sensitive to interest rate changes,” Moss says. “They are suitable for investors who want a low-risk investment option with relatively stable returns.”
SCHO offers exposure to the short end of the Treasury yield curve with a 0.03% expense ratio. By tracking the Bloomberg U.S. Treasury 1-3 Year Index, SCHO delivers a duration of 1.9 years, meaning that if interest rates rise by 100 basis points, the ETF is expected to lose just 1.9% in value, all else being equal.
SPDR Portfolio Intermediate Term Treasury ETF (SPTI)
“Intermediate-term bond ETFs typically invest in bonds with maturities between three and 10 years,” Moss says. “They offer a balance between risk and return and are suitable for investors who have a medium-term investment horizon.”
A low-cost pick in this category is SPTI, which tracks the Bloomberg 3-10 Year U.S. Treasury Index and carries a 0.03% expense ratio. This ETF currently has a duration of five years and a yield to maturity of 4.49%, which is the average return an investor can expect if all of its underlying bonds are held until maturity.
Vanguard Long-Term Treasury ETF (VGLT)
“Long-term bond ETFs invest in bonds with maturities of more than 10 years, are more sensitive to interest rate changes and may experience greater volatility in their returns,” Moss says. “They are suitable for investors who have a long-term investment horizon and can tolerate higher levels of risk.”
By tracking the Bloomberg U.S. Long Treasury Bond Index, VGLT provides exposure to a portfolio of bonds ranging in maturity from 10 to over 25 years. Currently, this translates to an average duration of 15.8 years and a yield to maturity of 4.1%. The ETF charges a 0.04% expense ratio.
iShares iBonds Dec 2025 Term Corporate ETF (IBDQ)
“The typical issue with bond ETFs is that they do not have a fixed maturity date like an individual bond,” says Craig Toberman, founder at Toberman Wealth. “This is why I like iShares iBonds ETFs that have issues all maturing within the same year, making them great for building bond ladders.”
A great example is IBDQ, which holds a portfolio of investment-grade corporate bonds all maturing between Jan. 1, 2025, and Dec. 15, 2025, paying out monthly income. Once all of its underlying bonds mature, the ETF will terminate and pay out its net asset value to investors.
Vanguard Total International Bond ETF (BNDX)
Buying international bonds from markets outside of the U.S. introduces new hurdles for investors in the form of currency conversion costs and possible brokerage restrictions. To circumvent this, investors can use international bond ETFs like BNDX, which charges a 0.07% expense ratio.
This ETF tracks the Bloomberg Global Aggregate ex-USD Float Adjusted RIC Capped Index, and it currently holds some 6,900 bonds from both international developing and emerging markets. The ETF is also hedged to the U.S. dollar to mitigate the volatility from fluctuating currency exchange rates.
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Update 09/07/23: This story was previously published at an earlier date and has been updated with new information.