Fixed-income investing can be perplexing, even to seasoned equity investors. Unlike stocks that trade on centralized exchanges, bonds typically trade over the counter.
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While purchasing U.S. Treasurys might be straightforward through platforms like TreasuryDirect.gov, navigating the corporate bond market often involves dealing with a Wall Street bond desk, which can be less transparent.
When deciding on bond investments, you also have several factors to evaluate, including maturity, credit quality and geography, all of which play a role in determining your investment’s risk-return profile.
Maturity affects how long you’ll receive payments for and also influences the bond’s sensitivity to interest rate changes. For instance, a 20-year bond is more sensitive to interest rate movements compared to a one-year bond because the longer maturity extends the period of risk exposure.
Credit quality lets you balance yield against risk. Lower credit quality generally means higher yields to compensate for an increased risk of default. For example, a high-yield “junk” bond from a distressed company will offer higher returns than a Treasury bill, but also carries a higher risk of not paying timely coupon payments or even the principal back at maturity.
Geography also plays a role. Bonds aren’t just issued by the U.S. government or domestic companies; international entities issue them too. This can introduce variations in risk and return — for instance, an Argentine bond might offer higher yields than a Canadian one, but also comes with greater risk.
But if learning the specifics of bond investing doesn’t appeal to you, consider bond funds. Available as mutual funds or exchange-traded funds (ETFs), they offer simplicity, liquidity and affordability.
“Given the higher risks and costs associated with portfolios of individual bonds, and the time they take to manage, most investors are better served by low-cost mutual funds and ETFs,” says Chris Tidmore, senior manager at Vanguard’s Investment Advisory Research Center. “This is particularly true in the case of municipal and corporate bonds, which are less liquid and harder to purchase than Treasury bonds.”
Most bond funds even convert the traditional semi-annual interest payments into monthly distributions, which can better align with income needs.
Additionally, bond fund providers usually display key metrics like yield to maturity, duration and average credit quality on their websites, making it easier than ever to understand what you’re investing in.
Here are five great fixed-income funds to buy in 2024:
| Fund | Yield to Maturity | Expense Ratio |
| Vanguard Total Bond Market Index Fund Admiral Shares (ticker: VBTLX) | 4.8% | 0.05% |
| iShares Core U.S. Aggregate Bond ETF (AGG) | 5.1% | 0.03% |
| Global X 1-3 Month T-Bill ETF (CLIP) | 5.1% | 0.07% |
| Invesco Total Return Bond ETF (GTO) | 6.6% | 0.25% |
| Invesco Ultra Short Duration ETF (GSY) | 6.1% | 0.23% |
Vanguard Total Bond Market Index Fund Admiral Shares (VBTLX)
“The main benefit of bond funds for investors is convenience,” Tidmore says. “Bond funds offer significant time savings over building and managing portfolios of individual bonds yourself, and allow investors to build a broadly diversified bond portfolio with only a few funds.” A great example is VBTLX, which tracks more than 11,000 government, agency, mortgage-backed and investment-grade corporate bonds represented by the Bloomberg U.S. Aggregate Float Adjusted Index for a 0.05% expense ratio.
With this fund, investors can currently expect a 6.1-year duration, representing intermediate interest rate sensitivity. All else being equal, a 100-basis point increase in rates will cause VBTLX to lose 6.1% in net asset value, while any equivalent decrease in rates would cause the opposite. You also get a 4.8% average yield to maturity, which is the theoretical total return expected if all of VBTLX’s current bonds were held until maturity. That said, be aware that this fund has a $3,000 minimum investment requirement.
iShares Core U.S. Aggregate Bond ETF (AGG)
Unlike bond mutual funds, shares of bond ETFs trade throughout the day. Therefore, instead of putting in a buy order that fills at one price at the end of day, investors can trade these ETFs just like stocks. “Some of the best bond ETFs have low fees, track close to their net asset value, have very tight bid-ask spreads of a penny or less and performance that closely hugs [their] benchmark,” says Michael Ashley Schulman, partner and chief investment officer at Running Point Capital Advisors.
A great bond ETF that embodies all these factors is AGG. This ETF is highly popular, having accumulated more than $107 billion in assets under management, or AUM. It is also very liquid, with a 0.01% 30-day median bid-ask spread. For a 0.03% expense ratio, you get a portfolio of bonds tracking the Bloomberg U.S. Aggregate Index, making it similar to VBTLX in terms of maturity and credit quality. Right now, investors can expect a 6-year duration against a 5.1% weighted average yield to maturity.
[SEE: 7 Best ETFs to Buy Now.]
Global X 1-3 Month T-Bill ETF (CLIP)
U.S. Treasury bills, or T-bills, tend to be among the safest fixed-income investments. To access T-bills in an ETF, Global X ETFs offers CLIP at a 0.07% expense ratio. “CLIP offers pure exposure to one-to-three-month zero-coupon T-bills, which are purchased at a discount and mature at par,” says Rohan Reddy, director of research at Global X ETFs. “Thanks to its ultra-short duration focus and the explicit U.S. government guarantee underpinning its holdings, CLIP carries negligible interest rate and credit risk.”
Normally, short-term fixed-income instruments like T-bills tend to pay lower yields, but that isn’t the case right now. Thanks to an inverted yield curve, short-term rates remain elevated, and thus CLIP pays a high 5.1% yield to maturity. “While money market funds often introduce credit risk in the form of holdings like commercial paper, CLIP invests 100% of its holdings in T-bills, thereby providing one of the most straightforward and transparent strategies for an investor’s short-term cash allocation,” Reddy says.
Invesco Total Return Bond ETF (GTO)
“GTO is an actively managed total return bond ETF in the core plus category,” says Brian McMullen, senior fixed-income strategist at Invesco. “It provides exposure to a core bond allocation but will also try to capture opportunities in non-core fixed-income segments such as high-yield corporate bonds, emerging market debt and non-agency mortgage-backed securities (MBS).” This gives the ETF greater flexibility and yield potential compared to the average aggregate bond index ETF like AGG.
Currently, GTO’s portfolio is still largely held in AAA-rated bonds at 49%. However, the ETF also has a modest allocation to non-investment grade bonds rated “BBB-” and lower to enhance total returns. Right now, investors can expect an above-average 6.6% yield to maturity and an intermediate 6.1-year effective duration. As with many bond ETFs, GTO also pays monthly distributions. The ETF usually charges a 0.5% expense ratio but is currently waiving it down to 0.25% until at least Aug. 31, 2025.
Invesco Ultra Short Duration ETF (GSY)
“GSY is an actively managed ultra-short-duration ETF that is designed to maximize current income while maintaining capital preservation for investors,” McMullen says. “It can invest in traditional money market securities like T-bills, commercial paper and repo securities, but can also diversify and take advantage of opportunities in other segments of the fixed-income market such as investment-grade corporate bonds, agency MBS, and ‘AAA’ rated collateralized loan obligations (CLOs).”
Thus, compared to a T-bill-only ETF like CLIP, GSY has higher credit risk, but not excessively so. The vast majority of this ETF’s holdings are still rated “BBB” and higher, with only 14% qualifying as “not rated.” But because it is less constrained with respect to its eligible holdings, GSY is able to deliver a higher 6.1% yield to maturity while still keeping duration very low at 0.8 years. As with GTO, GSY will also make monthly distributions. The ETF is also slightly cheaper with a 0.23% expense ratio.
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5 Great Fixed-Income Funds to Buy Now originally appeared on usnews.com
Update 05/13/24: This story was previously published at an earlier date and has been updated with new information
