If you’re considering integrating a bond component into your investment portfolio, you might encounter several challenges.
Direct purchases of individual bonds present their own set of complications. Buying Treasurys through TreasuryDirect.gov can be frustrating due to its outdated user interface, while acquiring corporate bonds over the counter at your broker can be daunting for those without fixed income experience.
One of the primary hurdles for aspiring bond investors is navigating through an array of fixed-income metrics essential for informed decision making. This includes understanding the yield to maturity, which represents the total return anticipated if the bond is held until it matures, and duration, a measure of the bond’s sensitivity to changes in interest rates.
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Accurately evaluating credit risk adds further complexity. While U.S. Treasurys are considered safe from default, corporate bonds carry varying degrees of risk, particularly high-yield “junk” bonds. Although these bonds might be rated by credit agencies, it’s crucial for investors to conduct their own due diligence and not take them at face value.
In light of these challenges, turning to a bond exchange-traded fund, or ETF, may be a wise choice.
“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.”
These funds simplify the investment process by holding a diversified basket of bonds, either replicating a specific bond index benchmark or constructed based on the active management decisions of portfolio managers and research teams.
This approach offers numerous advantages: It allows for much broader diversification than is possible with a single bond issue, provides excellent liquidity as ETF shares trade on exchanges just like stocks and offers the convenience of monthly distributions, contrasting with the typical semi-annual payouts from individual bonds.
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% | 5% |
| Vanguard Total World Bond ETF (BNDW) | 0.05% | 4.9% |
| Vanguard Core-Plus Bond ETF (VPLS) | 0.20% | 5.3% |
| DoubleLine Commercial Real Estate ETF (DCRE) | 0.39% | 6.2% |
| Global X 1-3 Month T-Bill ETF (CLIP) | 0.07% | 5.5% |
| SPDR Portfolio Corporate Bond ETF (SPBO) | 0.03% | 5.5% |
| JPMorgan Ultra-Short Income ETF (JPST) | 0.18% | 5.5% |
| iShares 7-10 Year Treasury Bond ETF (IEF) | 0.15% | 4.4% |
| iShares 10-20 Year Treasury Bond ETF (TLH) | 0.15% | 4.6% |
iShares Core U.S. Aggregate Bond ETF (AGG)
One of the most followed bond benchmarks is the Bloomberg U.S. Aggregate Index, referred to as the “Agg.” This index tracks over 11,000 government Treasurys, mortgage-backed securities (MBS) and investment-grade corporate bonds ranging from one to over 20 years in maturity.
To track the Agg, investors can use the aptly named AGG, which is one of the most popular bond ETFs, at $104 billion in assets. This ETF tracks the index by replicating its holdings for a low 0.03% expense ratio. It currently pays a 5% average yield to maturity and has an effective duration of six years.
Vanguard Total World Bond ETF (BNDW)
“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 even greater diversification compared to AGG, Vanguard offers BNDW. This ETF tracks the Bloomberg Global Aggregate Float Adjusted Composite Index by holding two underlying Vanguard ETFs providing exposure to U.S. and international bonds, respectively. BNDW charges a 0.05% expense ratio.
Vanguard Core-Plus Bond ETF (VPLS)
Investors looking to outperform passive bond index ETFs can use actively managed bond ETFs like VPLS. “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.
The “core” component of VPLS consists of Treasurys, MBS and investment-grade bonds, while the “plus” component seeks higher returns via riskier, lower-credit quality bonds. VPLS currently pays a 5.3% yield to maturity against a 5.9-year duration and charges a 0.2% expense ratio.
DoubleLine Commercial Real Estate ETF (DCRE)
“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 a spin on MBS investing with real estate exposure, consider DCRE.
This actively managed ETF primarily targets investment-grade MBS backed by commercial real property. These include agency- and non-agency-issued CMBS and commercial real estate collateralized loan obligations. DCRE currently pays a high 6.2% yield to maturity and maintains a low duration.
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.”
Thanks to their short maturities and ironclad credit quality, Treasury bills, or T-bills, possess excellent liquidity. To access T-bills, investors can buy CLIP, which delivers a competitive 5.5% yield to maturity while featuring a low 0.1-year duration. CLIP charges a 0.07% expense ratio.
[READ: What’s the Best Treasury ETF? 7 Options for Investors]
SPDR Portfolio Corporate Bond ETF (SPBO)
“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.”
For example, SPBO targets the Bloomberg U.S. Corporate Bond Index, which requires holdings to be investment grade. As a result, the underlying bonds are fairly liquid, which translates into a low 0.03% 30-day median bid-ask spread for SPBO. The ETF pays a yield to maturity of 5.5% and charges 0.03%.
JPMorgan Ultra-Short Income ETF (JPST)
“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.”
JPST is an actively managed short-term bond ETF that currently delivers low interest rate risk with a duration of just 0.6 year. By focusing on BBB- and A-rated securities, it manages to deliver a competitive 5.5% yield to maturity. It is also surprisingly cheap for an actively managed ETF, with a 0.18% expense ratio.
iShares 7-10 Year Treasury Bond ETF (IEF)
“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 intermediate Treasurys, iShares offers IEF.
IEF provides targeted exposure to the belly of the yield curve by replicating the ICE U.S. Treasury 7-10 Year Bond Index. Currently, investors can expect a duration of 7.3 years and a weighted average yield to maturity of 4.4%. The ETF charges a 0.15% expense ratio and also features an option chain for traders.
iShares 10-20 Year Treasury Bond ETF (TLH)
“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 bet on a possible rate cut can use an ETF like TLH, which tracks the ICE U.S. Treasury 10-20 Year Bond Index. With a duration of 12.8 years, this ETF can be expected to gain 12.8% in value should rates fall by 100 basis points, all else being equal. TLH charges a 0.15% expense ratio.
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9 of the Best Bond ETFs to Buy Now originally appeared on usnews.com
