The artificial intelligence (AI)-fueled bull market abruptly hit the brakes on Aug. 2, following a weak report showing slowing job growth and rising unemployment, which sparked recessionary fears and a broad market sell-off.
By market close, the Nasdaq had fallen 2.43%, but some notable companies fared far worse. For instance, Amazon.com Inc. (ticker: AMZN) had the bad luck of reporting earnings the previous day after close. Shares of Amazon fell 8.8% after the company provided lower-than-expected guidance and disclosed high levels of AI capital expenditure.
Not all assets were negatively affected, though. After being battered throughout 2022 by rising inflation and high interest rates, bonds saw a comeback, with the 10-year Treasury yield falling sharply and sending prices spiking.
[Sign up for stock news with our Invested newsletter.]
Numerous bond exchange-traded funds (ETFs), such as the iShares Core U.S. Aggregate Bond ETF (AGG) and the iShares 20+ Year Treasury Bond ETF (TLT), saw strong inflows over the month of July due to speculation of an eventual rate cut and weakness in equity markets. Both ETFs had positive returns on Aug. 2, with TLT gaining 3.1%.
Aside from years like 2022, bonds, especially high-quality Treasurys, usually have a low to negative correlation with equities. This results in a “flight to quality” effect when investors are in a risk-off sentiment.
Bond ETFs also benefit during sudden, significant market crashes, such as the onset of COVID-19 in March 2020, when drastic interest rate cuts amid fears of a global economic shutdown boosted prices.
Although you can use them for diversification in a portfolio to hedge an equity position, bond ETFs can also be used for income, as many pay monthly distributions. By going down in credit quality from Treasurys to investment-grade corporate or even junk bonds, you can get income that exceeds high-yield savings accounts.
Here are nine of the best bond ETFs to buy today:
| ETF | Expense ratio | Yield to maturity |
| Vanguard Total Bond Market ETF (BND) | 0.03% | 5.0% |
| Schwab Short-Term U.S. Treasury ETF (SCHO) | 0.03% | 4.8% |
| Schwab Intermediate-Term U.S. Treasury ETF (SCHR) | 0.03% | 4.4% |
| Schwab Long-Term U.S. Treasury ETF (SCHQ) | 0.03% | 4.6% |
| Vanguard Mortgage-Backed Securities ETF (VMBS) | 0.04% | 5.3% |
| SPDR Bloomberg 1-3 Month T-Bill ETF (BIL) | 0.14% | 5.3% |
| iShares iBoxx $ Investment Grade Corporate Bond ETF (LQD) | 0.14% | 5.2% |
| SPDR Bloomberg High Yield Bond ETF (JNK) | 0.40% | 7.8% |
| Vanguard Tax-Exempt Bond ETF (VTEB) | 0.05% | 3.7% |
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.”
BND tracks the Bloomberg U.S. Aggregate Float Adjusted Index, a variant of the benchmark used by AGG. It holds over 11,200 Treasurys, mortgage-backed securities and investment-grade corporate bonds of various maturities. As with most Vanguard ETFs, BND is affordable at a 0.03% expense ratio.
Schwab Short-Term U.S. Treasury ETF (SCHO)
“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.”
Right now, investors can expect a 4.8% average yield to maturity from SCHO, which tracks the Bloomberg U.S. Treasury 1-3 Year Index. This metric measures the ETF’s total return potential should all of its underlying bonds be held until maturity. SCHO is also affordable at a 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,” says Wes Moss, managing partner and chief investment strategist at Capital Investment Advisors. “They offer a balance between risk and return and are suitable for investors who have a medium-term investment horizon.” The Schwab bond ETF to use here is SCHR.
SCHR moves up the yield curve to track the Bloomberg U.S. Treasury 3-10 Year Index, offering a five-year duration. All else being equal, a 100-basis-point cut in rates would cause this ETF to gain 5% in net asset value. SCHR pays a 4.4% average yield to maturity and charges a 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.”
A cheaper alternative to TLT for long-term treasury exposure is SCHQ, which charges a 0.03% expense ratio versus 0.15% for TLT. This ETF tracks a portfolio of 86 Treasury bonds as represented by the Bloomberg U.S. Long Treasury Index, which has a 4.6% yield to maturity and a 14.9-year duration.
Vanguard Mortgage-Backed Securities ETF (VMBS)
“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. For example, the MBS held by VMBS currently pay a 5.3% yield to maturity with government-level credit ratings.
The MBS in this ETF are issued and guaranteed by Ginnie Mae, Fannie Mae and Freddie Mac. This provides buyers a measure of protection should the underlying loans default. Overall, VMBS has comparable interest rate sensitivity with SCHR, at a 5.4-year average duration.
[READ: 5 Great Fixed-Income Funds to Buy Now]
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.”
The most liquid bonds on the market are U.S. Treasury bills, or T-bills. These possess excellent credit ratings and strong liquidity thanks to their widespread use as collateral. You can access T-bills via an ETF like BIL, which charges a 0.14% expense ratio and pays a 5.3% yield to maturity.
iShares iBoxx $ Investment Grade Corporate Bond ETF (LQD)
“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.”
Despite holding investment-grade corporate bonds, LQD manages to achieve a very low 0.01% 30-day median bid-ask spread. This is because the ETF’s benchmark, the Markit iBoxx USD Liquid Investment Grade Index, makes liquidity a key criteria. LQD pays a 5.2% yield to maturity and charges 0.14%.
SPDR Bloomberg High Yield Bond ETF (JNK)
Non-investment-grade bonds, also known as junk bonds, tend to be less liquid than their investment-grade counterparts. However, high-yield bond ETFs still manage to deliver strong liquidity by using index criteria that screen out illiquid issuers. A great example is JNK.
This ETF tracks the Bloomberg High Yield Very Liquid Index and manages to achieve a minimal 0.01% 30-day median bid-ask spread, the same as LQD. Because it’s taking on higher credit risk, investors are compensated with a greater 7.8% yield to maturity. JNK charges a 0.4% expense ratio.
Vanguard Tax-Exempt Bond ETF (VTEB)
Income from bond ETFs tends to be fairly tax-inefficient, with one notable exception: municipal bond ETFs. Consider VTEB, which tracks the Standard & Poor’s National AMT-Free Municipal Bond Index. The income from this ETF is exempt from federal income taxes and the federal alternative minimum tax.
VTEB is best used if you’re investing outside of a tax-advantaged account and sit in a high income bracket. Currently, investors can expect an average duration of 6.4 years, a 3.7% yield to maturity and a 0.05% expense ratio. The ETF is also available in mutual fund form as Vanguard Tax-Exempt Bond Index Fund Admiral Shares (VTEAX).
More from U.S. News
The 7 Best New ETFs to Buy Now
7 Best Dividend ETFs to Buy Now
9 of the Best Bond ETFs to Buy Now originally appeared on usnews.com
Update 08/08/24: This story was previously published at an earlier date and has been updated with new information.
