9 of the Best Bond ETFs to Buy Now

Navigating the vast sea of over 600 bond exchange-traded funds, or ETFs, listed on U.S. exchanges can be formidable for any investor trying to pinpoint the perfect addition to their portfolio.

“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.”

With such a variety of choices, it’s essential to understand the various criteria that can guide the selection process, ensuring a tailored fit to individual investment goals and risk tolerance.

[Sign up for stock news with our Invested newsletter.]

While there’s no one-size-fits-all classification system for these ETFs, several key screener categories can help investors sift through the multitude of options.

First and foremost, understand the type of bond the ETF invests in. The fundamental characteristics of how a bond pays out — such as fixed-rate, floating rate, inflation-linked, asset-backed, mortgage-backed and even convertible — define the income predictability and risk profile of the investment.

Another way to categorize bond ETFs is by the issuer of the underlying bonds. Options range from Treasurys issued by the government, corporate bonds from companies, tax-exempt bonds from municipalities or even an aggregate mix of various types.

Investors should also consider the maturity of the bonds within the ETF, which determines the fund’s sensitivity to interest rate changes. ETFs can be categorized based on the average duration of their bond holdings — short, intermediate or long. This factor is pivotal in managing interest rate risk; shorter-duration bonds are less sensitive to interest rate fluctuations than longer-duration bonds.

Lastly, credit quality is a vital consideration. Investors can choose from ETFs focusing on AAA-rated Treasurys for maximum safety or venture into the higher-income potential but riskier high-yield “junk bonds.” There are also many options in between, allowing for a balanced approach to risk and return.

These categories are not mutually exclusive. By selectively combining them, bond ETF providers have developed the extensive range of over 600 ETF options available today. This diversity allows investors to precisely tailor their bond exposure according to their specific investment needs and risk appetite.

Here are nine of the best bond ETFs to buy today:

ETF Expense ratio Yield to maturity
Vanguard Total Bond Market ETF (ticker: BND) 0.03% 4.6%
Vanguard Core-Plus Bond ETF (VPLS) 0.20% 4.9%
iShares MBS ETF (MBB) 0.04% 4.9%
Invesco Ultra Short Duration ETF (GSY) 0.22% 5.8%
SPDR Bloomberg 1-3 Month T-Bill ETF (BIL) 0.14% 5.1%
iShares Aaa — A Rated Corporate Bond ETF (QLTA) 0.15% 5%
Schwab Short-Term U.S. Treasury ETF (SCHO) 0.03% 4.3%
Schwab Intermediate-Term U.S. Treasury ETF (SCHR) 0.03% 3.9%
Schwab Long-Term U.S. Treasury ETF (SCHQ) 0.03% 4.1%

Vanguard Total Bond Market ETF (BND)

“Investors have seen bond ETFs successfully weather multiple storms in the markets, including the pandemic-related sell-off in March 2020,” says John Croke, head of active fixed income product at Vanguard. “Time and again, bond ETFs have demonstrated their resilience and liquidity for investors.”

For low-cost bond exposure, Vanguard offers BND at a 0.03% expense ratio. This ETF is very popular, with over $105 billion in assets under management. BND tracks the Bloomberg U.S. Aggregate Float Adjusted Index, holding over 10,700 government Treasurys and corporate-issued investment-grade bonds.

Vanguard Core-Plus Bond ETF (VPLS)

Vanguard also offers VPLS, which can potentially help you outperform BND. “VPLS starts with core exposures to investment-grade fixed income, and layers on the flexibility to take advantage of opportunities in U.S. high-yield corporate and emerging markets bonds,” Croke says.

Essentially, VPLS holds a “core” portfolio similar to BND, augmented by a “plus” component that targets higher returns. “The fund’s active portfolio managers use a low 0.2% expense ratio to their advantage by opportunistically increasing risk exposures when market conditions are attractive,” Croke says.

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. A highly popular ETF for accessing these bonds is MBB.

This ETF tracks a portfolio of over 10,700 mortgage-backed securities issued by Ginnie Mae, Fannie Mae and Freddie Mac. Investors can expect a 5.6-year average duration and a competitive 4.9% yield to maturity. MBB currently charges a low 0.04% net expense ratio.

Invesco Ultra Short Duration ETF (GSY)

“Short-term bond ETFs 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.”

Investors looking to minimize interest rate risk may prefer an ETF like GSY, which targets a duration of just 0.8 year by holding primarily short-term, investment-grade corporate bonds. With short-term rates elevated at present, GSY is paying a high 5.8% yield to maturity. The ETF charges a 0.22% expense ratio.

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, 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.”

When it comes to bond liquidity, few can match Treasury bills, or T-bills. A great example is BIL, which achieves a very low 0.01% 30-day median bid-ask spread by tracking the Bloomberg 1-3 Month U.S. Treasury Bill Index. BIL currently pays a 5.1% yield to maturity and charges a 0.14% expense ratio.

[READ: What’s the Best Treasury ETF? 7 Options for Investors]

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.”

This mechanic can be seen in play with QLTA, which has a low 30-day median bid-ask spread of 0.02%. This ETF only holds corporate bonds rated A or higher, giving it much better liquidity and lower credit risk. Investors can expect a 5% average yield to maturity and a 0.15% 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.” Schwab’s offering in this category is SCHO.

SCHO tracks the Bloomberg U.S. Treasury 1-3 Year Index and manages to deliver a low 1.9-year duration against a 4.3% yield to maturity. This ETF is fairly popular, having attracted just over $10.5 billion in assets under management, largely due to its very affordable 0.03% expense ratio.

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.” For this role, Schwab offers SCHR.

The Bloomberg U.S. Treasury 3-10 Year Index tracked by SCHR currently provides investors with exposure to Treasurys averaging five years in duration and a 3.9% yield-to-maturity, which is lower than SCHO as short-term rates currently remain elevated. SCHR also charges a low 0.03% expense ratio.

Schwab Long-Term U.S. Treasury ETF (SCHQ)

“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.”

SCHQ represents Schwab’s bond ETF for investors looking to target the long end of the Treasury yield curve. It tracks the Bloomberg U.S. Long Treasury Index and delivers an average duration of 15.2 years against a 4.1% yield to maturity. Like SCHO and SCHR, SCHQ also charges a 0.03% expense ratio.

More from U.S. News

7 of the Best Fidelity Bond Funds to Buy for Steady Income

7 Best Vanguard Bond Funds to Buy

7 of the Best Tax-Free Municipal Bond Funds

9 of the Best Bond ETFs to Buy Now originally appeared on usnews.com

Update 03/11/24: This story was previously published at an earlier date and has been updated with new information.

Federal News Network Logo
Log in to your WTOP account for notifications and alerts customized for you.

Sign up