The U.S. bond market witnessed a significant recovery throughout 2023, rebounding from the substantial losses it incurred the previous year.
This comeback was demonstrated by the popular iShares Core U.S. Aggregate Bond ETF (ticker: AGG), which tracks the benchmark Bloomberg Aggregate Bond Index. By the end of 2023, AGG reported a total return of 5.7%, a noteworthy recovery considering its historically high loss of 13% in 2022.
A pivotal factor in this resurgence was the Federal Reserve’s monetary policy. In 2023, the Fed held interest rates steady three times consecutively, following a vigorous cycle of rate hikes, stabilizing the federal funds rate at between 5.25% and 5.5%.
Today, market expectation for 2024 is being shaped by the Fed’s “dot plot,” a chart that displays the interest rate outlooks of individual Federal Open Market Committee, or FOMC, members. Currently, investors are anticipating the potential for up to three rate cuts throughout the year.
These developments in monetary policy could create a favorable environment for bond investors, particularly when it comes to their ability to provide diversification within a portfolio.
In times of market volatility or economic uncertainty, bonds, especially high-quality Treasurys, often return inversely to equities, thereby offering a hedge against equity risk. This stems from a persistently low correlation that has held steady — with the exception of rare years like 2022.
In a context where interest rates are expected to decline, bond prices generally rise, as their fixed interest payments become more attractive relative to new bonds issued at lower rates. This dynamic can benefit bonds, making them a valuable tool for investors seeking to reduce overall portfolio risk.
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By purchasing a bond exchange-traded fund, or ETF, investors can easily enter a bond position with the same flexibility as trading individual stocks. These funds hold a basket of diversified bonds selected based on pre-set indexes or proprietary rules; they display important fixed-income metrics like the yield to maturity and duration on their webpages.
“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.”
Here are nine of the best bond ETFs to buy in 2024:
| Bond ETF | Expense Ratio | Yield to Maturity |
| Vanguard Total Bond Market ETF (BND) | 0.03% | 5.0% |
| iShares MBS ETF (MBB) | 0.04% | 4.8% |
| JPMorgan Ultra-Short Income ETF (JPST) | 0.18% | 5.5% |
| Global X 1-3 Month T-Bill ETF (CLIP) | 0.07% | 5.5% |
| iShares iBoxx $ Investment Grade Corporate Bond ETF (LQD) | 0.14% | 5.2% |
| Vanguard Short-Term Bond ETF (BSV) | 0.04% | 4.9% |
| Vanguard Intermediate-Term Bond ETF (BIV) | 0.04% | 4.9% |
| Vanguard Long-Term Bond ETF (BLV) | 0.04% | 5.2% |
| iShares International Treasury Bond ETF (IGOV) | 0.35% | 2.8% |
Vanguard Total Bond Market ETF (BND)
Buy-and-hold investors looking for maximum diversification may like BND. This ETF tracks a variant of the Bloomberg Aggregate Bond Index for a 0.03% expense ratio, and currently holds more than 10,000 Treasurys, mortgage-backed securities (MBS) and investment-grade corporate bonds of various maturities.
Currently, investors can expect a 5% yield to maturity, which is the theoretical return expected if the underlying bonds are held until maturity. BND also has a 6.3-year average duration, which implies a potential of a 6.3% price movement inverse to a 100-basis-point shift in rates, all else being equal.
iShares MBS ETF (MBB)
“MBS ETFs offer yields that are comparable to investment-grade corporate bonds, accompanied with high credit quality and monthly cash flows,” says Dave Francis, investment advisor and principal at Bartlett Wealth Management based in Cincinnati. For exposure to these bonds, investors can buy MBB.
MBB’s current portfolio consists of more than 10,000 bonds mostly issued by the Federal National Mortgage Association and the Federal Home Loan Mortgage Corporation, virtually all of which are rated AA. Investors can expect a 4.8% yield to maturity, a 5.8-year duration and a 0.04% expense ratio.
JPMorgan Ultra-Short Income ETF (JPST)
Investors looking to minimize interest rate risk in case of an unexpected rate hike can use JPST, which is actively managed and has a duration of just 0.5 years. Right now, the ETF is paying a strong yield to maturity of 5.5%, while charging a 0.18% expense ratio, which is reasonable for actively managed ETFs. “Short-term bond ETFs like JPST have compelling yields, which will do well while short-term rates remain high,” Francis says. “They also have the benefit of providing higher rates, even as the Federal Reserve begins reducing the overnight rates, which will immediately impact the yields on money market funds.”
Global X 1-3 Month T-Bill ETF (CLIP)
“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, chief investment officer at Blue Chip Partners. “A bond ETF’s liquidity, for the most part, is driven by the liquidity of its underlying securities.”
CLIP manages to achieve a small 30-day median bid-ask spread of 0.04% by tracking highly liquid Treasury bills with less than three months to maturity. Currently, the ETF is paying a 5.5% yield to maturity against a 0.1-year duration. It is also fairly cheap with a 0.07% expense ratio.
iShares iBoxx $ Investment Grade Corporate Bond ETF (LQD)
“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.”
LQD demonstrates this mechanic well. The ETF tracks the Markit iBoxx USD Liquid Investment Grade Index, which screens its holdings for above-average liquidity. This results in LQD having a very low 30-day median bid-ask spread of just 0.01%, despite holding corporate bonds. The ETF charges 0.14% and has a 5.2% yield to maturity.
[See: 10 of the Best Stocks to Buy This Year.]
Vanguard Short-Term Bond ETF (BSV)
“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 diversified bond ETF to watch here is BSV.
This ETF tracks the Bloomberg U.S. 1–5 Year Government/Credit Float Adjusted Index. As its name suggests, it features both Treasurys and corporate bonds of a short maturity. BSV currently pays a 4.9% yield to maturity against a 2.6-year duration and charges a 0.04% expense ratio.
Vanguard Intermediate-Term Bond ETF (BIV)
“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.” The Vanguard bond ETF to buy here is BIV.
Compared to BSV, BIV ventures further out into the yield curve by tracking the Bloomberg U.S. 5–10 Year Government/Credit Float Adjusted Index. The result is a 4.9% yield to maturity and an average duration of 6.2 years. It also charges the same low 0.04% expense ratio as BSV does.
Vanguard Long-Term Bond ETF (BLV)
“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.”
Investors looking to maximize the upside from potential interest rate cuts in 2024 can use a long-term bond ETF like BLV. This ETF tracks the Bloomberg U.S. Long Government/Credit Float Adjusted Index, delivering a yield to maturity of 5.2% and duration of 13.8 years. BLV also charges 0.04% in fees.
iShares International Treasury Bond ETF (IGOV)
The previous ETFs on this list featured high allocations to domestic bonds. However, not all countries have interest rates, inflation rates or other economic indicators that follow the U.S. market. Thus, diversifying a bond allocation globally can provide tangible benefits if the U.S. bond market falters.
A great ETF for this role is IGOV, which tracks the FTSE World Government Bond Index-Developed Markets Capped Index. This ETF holds more than 700 government-issued bonds from countries like Japan, France, Italy, Germany and more, hedged to the U.S. dollar. IGOV charges a 0.35% expense ratio and has a 2.8% yield to maturity.
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9 of the Best Bond ETFs to Buy Now originally appeared on usnews.com
Update 01/08/24: This story was previously published at an earlier dated and has been updated with new information.
