Bill Gross, often referred to as the “Bond King,” issued a cautionary view on the state of bond funds recently. As a pioneering fixed-income manager and co-founder of Pimco, where he ran the influential Pimco Total Return Fund (ticker: PTTRX), Gross once set a high standard for active bond investing.
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However, he now declares that “Total return is dead. Don’t let them sell you a bond fund.” But what exactly does this mean for you as a bond investor?
Gross argues that the concept of “total return,” which was coined by Pimco during the challenging bond market of the early 1980s, relied on exceptionally high Treasury yields of 15% at the time, which afforded bond investors an excellent margin of safety.
According to Gross, this strategy worked well for decades, until yields plummeted to near-zero by the summer of 2020 as a result of central bank intervention during the COVID-19 pandemic.
This changed the dynamic drastically, with bonds suffering historically high losses in 2022 as interest rates zoomed higher. Investors who took on excessive durations (a measure of interest rate sensitivity, with longer-dated bonds having higher duration) in a hunt for higher yields suffered big losses.
Today, Gross believes that the potential of total return bond funds is akin to the Greek myth of Sisyphus futilely rolling his boulder uphill — destined to slide back again and again instead of making progress. That is, at this time Gross believes there are more headwinds in store for bond investors than tailwinds.
Despite Gross’s pessimism, bond funds, including both mutual funds and exchange-traded funds (ETFs), may still hold value for the average investor. This is especially true given the proliferation of passively managed, index-tracking bond funds that charge expense ratios as low as 0.03% in some cases.
Conservative investors might find bond funds useful for reducing portfolio volatility, and those seeking income might appreciate their monthly distributions. When in ETF form, they also provide great liquidity given that they trade throughout the day on exchanges, much like individual stocks do.
“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 today:
| Bond ETF | Expense Ratio | Yield to maturity |
| Vanguard Total Bond Market ETF (BND) | 0.03% | 5% |
| Vanguard Short-Term Bond ETF (BSV) | 0.04% | 4.7% |
| Vanguard Intermediate-Term Bond ETF (BIV) | 0.04% | 4.7% |
| Vanguard Long-Term Bond ETF (BLV) | 0.04% | 5% |
| iShares MBS ETF (MBB) | 0.04% | 5.3% |
| iShares 0-3 Month Treasury Bond ETF (SGOV) | 0.07% | 5.4% |
| iShares Aaa – A Rated Corporate Bond ETF (QLTA) | 0.15% | 5.3% |
| SPDR Bloomberg High Yield Bond ETF (JNK) | 0.40% | 7.9% |
| Pimco Active Bond ETF (BOND) | 0.55% | 5.8% |
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.”
Vanguard’s flagship bond ETF is BND, which has around $107 billion in share class net assets and charges a low 0.03% expense ratio. As an aggregate bond ETF, BND holds Treasurys, mortgage-backed securities (MBS) and investment-grade corporate bonds of multiple maturities.
Vanguard Short-Term Bond ETF (BSV)
“Short-term bond ETFs have compelling yields, which will do well while short-term rates remain high,” says Dave Francis, investment advisor and principal at Bartlett Wealth Management. “They also have the benefit of providing higher rates, even if the Federal Reserve begins reducing the overnight rates.”
BSV tracks the Bloomberg U.S. 1-5 Year Government/Credit Float Adjusted Index, which also holds Treasurys, MBS and investment-grade corporate bonds. This ETF currently has an average duration of 2.7 years and pays a 4.7% yield to maturity. It charges a low 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.” For this category, Vanguard offers BIV at a 0.04% expense ratio.
BIV holds the same types of bonds as BSV does, but moves farther out on the yield curve by tracking the Bloomberg U.S. 5-10 Year Government/Credit Float Adjusted Index. This results in a similar yield to maturity of 4.7%, but greater interest-rate sensitivity with a 6.2-year average duration.
[SEE: 7 Best Vanguard Funds to Buy and Hold]
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.”
To track the long end of the yield curve, investors can use BLV, which tracks the Bloomberg U.S. Long Government/Credit Float Adjusted Index. As with BSV and BIV, BLV tracks the same types of bonds but with a much higher 13.9-year average duration. It currently pays a 5% yield to maturity.
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,” Francis says. These bonds can also provide investors with indirect real estate exposure with steadier distributions and lower volatility than a real estate investment trust (REIT) fund.
For low-cost exposure to the MBS market, iShares offers MBB at a 0.04% expense ratio. This ETF holds bonds issued by entities like the Federal National Mortgage Association and the Federal Home Loan Mortgage Corp. It has a duration of 5.8 years and pays a 5.3% average yield to maturity.
iShares 0-3 Month Treasury Bond ETF (SGOV)
“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 liquidity, few bonds can match Treasury bills (also known as T-bills) thanks to their high credit quality and ultra-short maturities. For T-bill exposure, iShares offers SGOV, which has virtually no interest rate risk and pays a 5.4% average yield to maturity. It charges a 0.07% net expense ratio.
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.”
The cutoff for investment-grade corporate bonds is a “BBB” rating, but QLTA takes it a step higher by only holding A- to Aaa-rated bonds. The result is high liquidity, with a 0.02% 30-day median bid-ask spread. QLTA has a duration of seven years, a yield to maturity of 5.3% and charges a 0.15% expense ratio.
SPDR Bloomberg High Yield Bond ETF (JNK)
Investment-grade corporate bonds and Treasurys may have a lower risk of default, but their higher credit ratings also lead to smaller yields. For increased income potential, investors can buy JNK, which targets high-yield “junk bonds” via the Bloomberg High Yield Very Liquid Index for a 0.4% expense ratio.
The bonds in JNK have a fairly low duration of 3.2 years but manage to deliver a higher 7.9% yield. However, remember that is meant to compensate investors for the higher probability of default. That being said, the 1,000-plus bond holdings in JNK offer some level of diversification to mitigate this.
Pimco Active Bond ETF (BOND)
Today, investors who disagree with Gross can still access a variant of Pimco’s famous “total return” strategy via BOND. Unlike the previous ETFs, BOND is actively managed and does not track an index. It is also significantly more expensive, with a 0.55% net expense ratio due to the use of active management.
With this ETF, investors can expect a 6.1-year average duration and 5.8% yield to maturity, which exceeds the average aggregate bond ETF. Since its inception, BOND has also managed to outperform its benchmark, the Bloomberg U.S. Aggregate Index, although future outperformance is not guaranteed.
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9 of the Best Bond ETFs to Buy Now originally appeared on usnews.com
Update 05/07/24: This story was previously published at an earlier date and has been updated with new information.
