9 of the Best Bond ETFs to Buy Now

If you’re shopping around for a bond exchange-traded fund, or ETF, you’re going to get numerous advantages over investing in individual bonds — namely greater diversification, monthly income in most cases, and stock-like liquidity.

“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.”

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However, there’s a few more items to add to your checklist before you buy a bond ETF. The first is to understand the bond ETF’s strategy: Is it active or passive? Active ETFs rely on expert fixed-income managers to select a portfolio of bonds, which gives investors the chance to outperform an underlying benchmark. Passive ETFs, on the other hand, replicate an index, typically resulting in lower fees.

You’ll also want to check the holdings by the issuer: Where are the bonds from? Are they from a government entity, like the U.S. Department of the Treasury or a municipality? Or do they come from a corporation? Perhaps they are issued by a foreign entity, like the Canadian government or a U.K. bank.

Make sure the credit quality is to your liking. These are standardized letter grades from major rating agencies like Moody’s Corp. (ticker: MCO) and S&P Global Inc. (SPGI), indicating how likely a bond issuer is to default. For example, investment-grade bond ETFs tend to be safer, while “junk bond” ETFs pay higher yields but have greater risk.

Finally, the last metric to watch is interest rate sensitivity. Just like individual bonds, the price of bond ETFs moves inversely to interest rate changes. This is governed by a bond ETF’s duration, which is measured in years and indicates how many percentage points the ETF’s price is expected to move relative to a 100-basis-point move in interest rates, all else being equal.

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

Bond ETF Net Expense Ratio Yield to maturity
Vanguard Total Bond Market ETF (BND) 0.03% 5.1%
iShares U.S. Treasury Bond ETF (GOVT) 0.05% 4.6%
iShares Broad USD Investment Grade Corporate Bond ETF (USIG) 0.04% 5.5%
Vanguard Short-Term Bond ETF (BSV) 0.04% 5.0%
Vanguard Intermediate-Term Bond ETF (BIV) 0.04% 4.9%
Vanguard Long-Term Bond ETF (BLV) 0.04% 5.2%
SPDR Portfolio Mortgage-Backed Bond ETF (SPMB) 0.04% 5.3%
Schwab High Yield Bond ETF (SCYB) 0.03% 7.7%
Global X 1-3 Month T-Bill ETF (CLIP) 0.07% 5.4%

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.”

With more than $107 billion in assets under management (AUM) for its share class, BND is one of the largest and most popular bond ETFs. For a 0.03% expense ratio, BND tracks the Bloomberg U.S. Aggregate Float Adjusted Index, holding more than 11,100 bonds with an average 5.1% yield to maturity and 6-year duration.

iShares U.S. Treasury Bond ETF (GOVT)

“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.”

The most liquid (and safe) bonds tend to be U.S. government-issued Treasurys. As such, a broad Treasury ETF like GOVT trades with a low 0.04% 30-day median bid-ask spread and an “AA” credit rating. This ETF currently pays a 4.6% average yield to maturity against a 5.9-year duration and 0.05% expense ratio.

iShares Broad USD Investment Grade Corporate Bond ETF (USIG)

“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 can be seen with USIG, which manages to achieve a 0.02% 30-day bid-ask spread. The minimum credit rating for bonds in USIG’s portfolio is “BBB,” with most rated “A”. The ETF pays a 5.5% yield to maturity and carries a 6.6-year average duration. It is also cheap with a 0.04% expense ratio.

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’s average duration of 2.6 years makes it far less volatile in response to interest rate changes compared to BND. However, as short-term rates remain high, the ETF is also paying a competitive 5% yield to maturity. Thanks to its passive indexing strategy, BSV also charges a low 0.04% expense ratio.

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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.” Vanguard’s low-cost offering for this portion of the yield curve is BIV.

BIV tracks the Bloomberg U.S. 5-10 Year Government/Credit Float Adjusted Index, which as its name suggests includes both Treasurys and investment-grade corporate bonds. Currently, the ETF offers a 4.9% yield to maturity and an average duration of 6.2 years. It also charges a 0.04% expense ratio.

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.”

BLV tracks the Bloomberg U.S. Long Government/Credit Float Adjusted Index, which gives it a similar portfolio in terms of credit risk as BSV and BIV, but with markedly higher interest rate sensitivity. Currently, this ETF has a yield to maturity of 5.2% and an average duration of 13.7 years.

SPDR Portfolio Mortgage-Backed Bond ETF (SPMB)

“Mortgage-backed securities (MBS) ETFs offer yields that are comparable to investment-grade corporate bonds, accompanied with high credit quality and monthly cash flows,” Francis says. The ETF in this space to watch is SPMB, which charges a net expense ratio of just 0.04%, as part of SPDR’s low-cost “Portfolio” lineup of ETFs.

This ETF tracks the Bloomberg U.S. MBS Index, which holds more than 2,400 mortgage-backed bonds issued by government entities like Ginnie Mae, Fannie Mae and Freddie Mac. Overall, its risk and return profile is very similar to aggregate bond ETFs with a 5.3% yield to maturity and a 6.1-year average duration.

Schwab High Yield Bond ETF (SCYB)

Going below the “BBB” credit rating threshold takes investors from investment-grade bonds to high-yield bonds, colloquially referred to as “junk bonds.” These bonds offer higher coupons to compensate for the greater risk of default. But, if you access a diversified portfolio of them via an ETF like SCYB, the risk is reduced significantly.

Most high-yield bond ETFs tend to charge higher expense ratios due to the lower liquidity of this segment. But SCYB undercuts them with a low 0.03% expense ratio, the same as BND. The ETF currently pays a 7.7% average yield to maturity while having a fairly low duration of just 3.3 years.

Global X 1-3 Month T-Bill ETF (CLIP)

Looking for an alternative to money market funds? Consider a Treasury bill, or T-bill, ETF like CLIP, which offers a combination of high yields thanks to elevated interest rates and a low duration. Currently, investors holding CLIP can expect a yield to maturity of 5.4% and a duration of 0.1 years.

CLIP’s portfolio consists of multiple Treasury bills with one to three months remaining in maturity. Because these holdings are very liquid, investors buying and selling CLIP only have to pay an average 30-day median bid-ask spread of 0.04%. The ETF’s expense ratio is also reasonable at 0.07%.

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

Update 07/03/24: This story was previously published at an earlier date and has been updated with new information.

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