As the market rally that began in 2023 extends into 2024, the allure of soaring stock prices may have led some investors to overlook the fundamental role of bonds in a well-rounded portfolio.
This oversight, often a result of recency bias — a tendency to give undue weight to recent events over historical data — can skew perceptions of risk and reward.
While the appeal of high returns is undeniable, for all but the most risk-tolerant investors, an allocation to bonds is essential for substantial diversification benefits.
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Notably, bonds play a crucial role in reducing volatility — the degree of variation in investment returns over time — and drawdowns, which represent the peak-to-trough decline during a specific period for an investment.
The importance of bonds is not mere conventional wisdom; it is a strategy proven across numerous notable market crises.
For example, a portfolio composed entirely of U.S. stocks would have experienced significant losses during major market downturns: falling 29.3% during Black Monday in 1987, 44.1% during the dot-com crash that began in March 2000, 50.9% during the subprime crisis of November 2007 and 20.9% during the COVID-19 market turmoil in March 2020.
In contrast, a more balanced and diversified portfolio, with 60% in U.S. stocks and 40% in U.S. aggregate bonds, would have seen considerably softer falls: 19.2%, 21.7%, 30.7% and 11.9%, respectively.
For investors aware of the protective value bonds offer, today’s market offers a streamlined way to diversify through bond exchange-traded funds, or ETFs.
“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 ETFs address many common concerns associated with investing in individual bonds, such as the high minimum investment requirements, the complexity of bond laddering strategies for maturity diversification and the often-less-liquid nature of the bond market.
Moreover, bond ETFs provide the dual benefits of volatility reduction and monthly income generation at a low cost, making them an attractive option for investors seeking to balance their portfolios in a market that remains unpredictable.
Here are nine of the best bond ETFs to buy today:
| ETF | Expense ratio | Yield to maturity |
| iShares Core U.S. Aggregate Bond ETF (ticker: AGG) | 0.03% | 4.8% |
| Vanguard Total International Bond ETF (BNDX) | 0.07% | 4.7% |
| iShares iBoxx $ Investment Grade Corporate Bond ETF (LQD) | 0.14% | 5.3% |
| iShares iBoxx $ High Yield Corporate Bond ETF (HYG) | 0.49% | 7.6% |
| Vanguard Mortgage-Backed Securities ETF (VMBS) | 0.04% | 4.6% |
| JPMorgan Ultra-Short Income ETF (JPST) | 0.18% | 5.4% |
| SPDR Portfolio Short Term Treasury ETF (SPTS) | 0.03% | 4.5% |
| SPDR Portfolio Intermediate Term Treasury ETF (SPTI) | 0.03% | 4.2% |
| SPDR Portfolio Long Term Treasury ETF (SPTL) | 0.03% | 4.5% |
iShares Core U.S. Aggregate Bond ETF (AGG)
One of the most popular bond market benchmarks is the Bloomberg U.S. Aggregate Bond Index, which tracks government-issued Treasurys, mortgage-backed securities, or MBS, and investment-grade corporate bonds. To track this index, investors can buy AGG at a 0.03% expense ratio.
AGG currently has an average yield to maturity of 4.8%, which is the theoretical return expected if the underlying bonds are held until maturity. The ETF has a 6.1-year duration, which means that a 100-basis-point shift in interest rates will cause a 6.1% inverse price movement, all else being equal.
Vanguard Total International Bond ETF (BNDX)
The internationally diversified counterpart to the Bloomberg U.S. Aggregate Bond Index is the Bloomberg Global Aggregate ex-USD Float Adjusted RIC Capped Index. This index targets major fixed-income markets from around the world across both government and corporate issuers.
To track this index, Vanguard offers BNDX at a low 0.07% expense ratio. Currently, investors can expect a 4.7% average yield to maturity and a 7.3-year duration. Importantly, BNDX is also currency hedged to mitigate adverse volatility from fluctuations in exchange rates.
iShares iBoxx $ Investment Grade Corporate Bond ETF (LQD)
“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.”
A great example of this mechanism at play is LQD, which currently has a low 30-day median bid-ask spread of just 0.01% thanks to its benchmark, the Markit iBoxx USD Liquid Investment Grade Index. Investors can expect a 5.3% yield to maturity, an 8.3-year duration and a 0.14% expense ratio.
iShares iBoxx $ High Yield Corporate Bond ETF (HYG)
“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.”
However, there are bond ETFs falling outside of these categories that still provide excellent liquidity. An example is HYG, which tracks high-yield bonds but still manages to achieve a low 0.01% 30-day median bid-ask spread. HYG has a high 7.6% yield to maturity, a low 3.3-year duration and a 0.49% expense ratio.
Vanguard Mortgage-Backed Securities ETF (VMBS)
“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. For affordable exposure to these bonds, consider VMBS.
VMBS primarily invests in a portfolio of over 1,200 bonds issued by three mortgage agencies: Ginnie Mae, Fannie Mae and Freddie Mac. Currently, investors can expect an average duration of 6.5 years and a 4.6% yield to maturity. Like many Vanguard ETFs, VMBS is affordable at a 0.04% expense ratio.
[READ: 7 Best Vanguard Bond Funds to Buy]
JPMorgan Ultra-Short Income ETF (JPST)
“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.”
This ETF does not track an index. Instead, JPST’s team actively selects a portfolio of high-quality short-term bonds to deliver a high net yield to maturity of 5.4% at present, while keeping duration low at 0.5 year. Despite the use of active management, the ETF is fairly affordable with a 0.18% expense ratio.
SPDR Portfolio Short Term Treasury ETF (SPTS)
“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.” A low-cost example is SPTS, which charges 0.03%.
This ETF tracks the short end of the Treasury yield curve via the Bloomberg 1-3 Year U.S. Treasury Index. Its 103 current bond holdings collectively average out to a 4.5% yield to maturity and a low 1.8-year duration. It is also fairly liquid, with a 0.03% 30-day median bid-ask spread.
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.” The low-cost SPDR ETF to watch here is SPTI.
This ETF tracks the Bloomberg 3-10 Year U.S. Treasury Index, giving investors exposure to the middle of the Treasury yield curve. Right now, investors can expect a 4.2% yield to maturity and a five-year duration. Like SPTS, SPTI is very affordable, with the same 0.03% expense ratio.
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.”
Investors looking for exposure to the long end of the Treasury yield curve can use SPTL, which tracks the Bloomberg Long U.S. Treasury Index. This ETF has a 4.5% yield to maturity, and high interest rate sensitivity thanks to a 15.3-year duration. It also charges a low 0.03% expense ratio.
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9 of the Best Bond ETFs to Buy Now originally appeared on usnews.com
Update 02/12/24: This story was previously published at an earlier date and has been updated with new information.
