The financial landscape has evolved rapidly over the years, bringing innovations that cater to a wide array of investor needs. At the forefront of this evolution is the exchange-traded fund, or ETF.
Boasting a highly versatile structure, an ETF has the capability to “wrap” an array of different investment assets into its underlying basket of holdings. This includes stocks, commodities and bonds.
Traditionally, the bond market has been characterized by its relatively opaque nature, primarily because most bonds trade over the counter, which can lead to reduced transparency and liquidity for the average investor.
However, bond ETFs have ushered in a much-needed degree of transparency, liquidity and accessibility to the world of fixed income. With them, the often-cumbersome task of calculating bond prices, which can deter some investors, becomes a non-issue.
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“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.”
Bond ETF providers also lay out essential metrics, such as yield to maturity, credit quality and duration on accessible online platforms, streamlining the process for investors and making them much easier to understand from a risk-return perspective.
An added feather in the cap of bond ETFs is their distribution frequency. Unlike the traditional bonds that pay out semi-annually, a majority of bond ETFs pay on a monthly basis. This offers investors a more regular source of income and can also make cash flow management considerably more predictable.
Here are nine of the best bond ETFs to buy now:
| Bond ETF | Expense Ratio | Yield to maturity |
| Vanguard Total Bond Market ETF (ticker: BND) | 0.03% | 4.9% |
| iShares Core U.S. Aggregate Bond ETF (AGG) | 0.03% | 5.5% |
| iShares Core Total USD Bond Market ETF (IUSB) | 0.06% | 5.8% |
| SPDR Bloomberg 1-3 Month T-Bill ETF (BIL) | 0.1354% | 5.4% |
| iShares U.S. Treasury Bond ETF (GOVT) | 0.05% | 4.9% |
| iShares Aaa – A Rated Corporate Bond ETF (QLTA) | 0.15% | 5.9% |
| Vanguard Short-Term Treasury ETF (VGSH) | 0.04% | 4.9% |
| Schwab Intermediate-Term U.S. Treasury ETF (SCHR) | 0.03% | 4.1% |
| SPDR Portfolio Long Term Treasury ETF (SPTL) | 0.03% | 5% |
Vanguard Total Bond Market ETF (BND)
“BND provides diversified exposure to various sectors and maturities within the bond market by tracking the performance of the Bloomberg U.S. Aggregate Float Adjusted Index,” says Michael Ashley Schulman, partner and chief investment officer at Running Point Capital.
This ETF provides investors with broad exposure to more than 10,000 U.S. government, mortgage-backed and investment-grade corporate bonds for a 0.03% expense ratio. Right now, BND pays a yield to maturity of 4.9% against an average duration of 6.4 years.
iShares Core U.S. Aggregate Bond ETF (AGG)
iShares’ direct competitor to BND is AGG, which, as its ticker suggests, tracks the benchmark Bloomberg U.S. Aggregate Bond Index. The result is a portfolio of more than 11,000 mortgage-backed and investment-grade corporate bonds, averaging out to a 5.5% yield to maturity and 6-year duration.
Like BND, AGG is built with low fees in mind, charging an expense ratio of just 0.03%. The fund is also extremely popular, with around $90 billion in assets under management, or AUM, and a 30-day average trailing volume of more than 8 million shares.
iShares Core Total USD Bond Market ETF (IUSB)
The underlying indexes that AGG and BND track are limited to investment-grade bonds. For additional exposure to some high-yield “junk” bonds, investors can use IUSB. This ETF tracks the broader Bloomberg U.S. Universal Index, which also includes a small allocation to non-investment-grade bonds rated lower than BBB.
However, because the allocation of these bonds is still fairly small within IUSB, the ETF has similar overall portfolio metrics compared to AGG, with a duration of 5.8 years against a yield to maturity of 5.8%. However, IUSB does charge a slightly higher expense ratio of 0.06%.
SPDR Bloomberg 1-3 Month T-Bill ETF (BIL)
“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.” Some of the most liquid types of bonds are U.S. Treasury bills, or T-bills. These are government-issued bonds with a very short time until maturity, typically under one year. For exposure to Treasurys with one-to-three months to maturity, investors can use BIL, which charges a 0.1354% expense ratio. This ETF has very little interest rate risk with a duration of 0.1 year, while paying a decent yield to maturity of 5.4% thanks to the current inverted yield curve that benefits short-term bonds.
iShares U.S. Treasury Bond ETF (GOVT)
T-bill ETFs like BIL focus on the very short end of the Treasury yield curve. Investors looking for broader exposure to the total Treasury market may prefer an ETF like GOVT. This ETF tracks the ICE U.S. Treasury Core Bond Index, which holds Treasurys ranging from under a year to more than 20 years in maturity.
Compared to AGG, GOVT has a much better average credit quality, given that it lacks corporate bonds. However, as a result, it pays a lower yield to maturity of 4.9%, against a duration of 5.8 years. Still, investors looking for iron-clad credit quality may prefer the lower risk-reward dynamics of this ETF.
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iShares Aaa – A Rated Corporate Bond ETF (QLTA)
“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.”
A great example of this in play is QLTA, which maintains a small 30-day median bid-ask spread of 0.02% despite having much lower volume compared to AGG. This ETF only holds A to Aaa-rated investment-grade corporate bonds, giving it much higher credit quality. QLTA charges a 0.15% expense ratio. The fund has an effective duration of 6.7 years and a yield to maturity of 5.9%.
Vanguard Short-Term Treasury ETF (VGSH)
“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.”
Vanguard’s low-cost offering in this space is VGSH, which holds a portfolio of 97 Treasury bonds averaging a duration of 1.9 years for a 0.04% expense ratio. Currently, the ETF is paying out a 4.9% yield to maturity. Because it is composed of Treasurys only, VGSH has a very high credit quality.
Schwab Intermediate-Term U.S. Treasury ETF (SCHR)
“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 great example of an intermediate-term Treasury ETF is SCHR, which tracks the Bloomberg U.S. Treasury 3-10 Year Index for a 0.03% expense ratio. The 100-plus holdings in SCHR currently average out to a 5.1-year duration against a 4.1% yield to maturity.
SPDR Portfolio Long Term Treasury ETF (SPTL)
“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.”
For exposure to the long end of the Treasury yield curve, consider SPTL, which, as part of SPDR’s “Portfolio” ETF lineup, charges a low 0.03% expense ratio. This ETF tracks the Bloomberg Long U.S. Treasury Index, giving it an average yield to maturity of 5% against a 15-year duration.
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9 of the Best Bond ETFs to Buy Now originally appeared on usnews.com
Update 10/06/23: This story was previously published at an earlier date and has been updated with new information.
