If you’re looking to build the bond component of your exchange-traded fund (ETF) portfolio, it’s essential to think of your selection criteria as a set of different levers to push and pull.
That is, bond ETFs come with various traits, and by adjusting these traits, you can better tailor your portfolio to suit your investment objectives and risk tolerance.
One key lever is duration, which measures a bond ETF’s price sensitivity to interest rate changes. When rates rise, bond ETF prices fall. Conversely, bond ETF prices tend to rise when rates fall. Both of these scenarios are governed by a bond ETF’s duration.
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Longer-duration bond ETFs are more sensitive to rate movements, offering more upside potential when rates fall, but come with greater downside risk if rates rise. On the other hand, shorter-duration bond ETFs provide more stability but sacrifice some upside potential for reduced sensitivity to rate changes.
Another lever is credit quality, which is a qualitative and quantitative assessment of how likely the bond issuer is to default on its obligations.
For example, you can contrast U.S. Treasury bond ETFs, known for their stability, against junk bond ETFs, which offer higher yields but come with increased credit risk. A rule of thumb: The lower the credit quality, the higher the yield, but greater risk of default.
Finally, you can select your bond ETF by geography. The U.S. isn’t the only country that issues debt to fund its needs — other governments from nations around the world play a similar role.
International bonds, particularly from emerging markets, provide opportunities for diversification. These might expose you to other interest rate regimes and economic environments, potentially offering higher yields in exchange for greater risks, such as currency fluctuations and geopolitical instability.
The great thing about bond ETFs is that these levers are not mutually exclusive. For instance, you can access combinations like short-duration, high-yield emerging market bonds or long-duration U.S. Treasurys, all within the ETF space.
With new bond ETFs launching regularly, the variety of options continues to grow, allowing for increased flexibility and strategic allocation potential.
Here are nine of the best bond ETFs to buy today:
| ETF | Expense ratio | Yield to maturity |
| Vanguard Total Bond Market ETF (ticker: BND) | 0.03% | 4.6% |
| Vanguard Short-Term Bond Index Fund ETF (BSV) | 0.04% | 4.4% |
| Vanguard Intermediate-Term Bond ETF (BIV) | 0.04% | 4.5% |
| Vanguard Long-Term Bond ETF (BLV) | 0.04% | 5.0% |
| iShares MBS ETF (MBB) | 0.04% | 4.5% |
| iShares 0-3 Month Treasury Bond ETF (SGOV) | 0.09% | 5.2% |
| iShares Broad USD Investment Grade Corporate Bond ETF (USIG) | 0.04% | 4.8% |
| SPDR Bloomberg High Yield Bond ETF (JNK) | 0.40% | 7.4% |
| SPDR Bloomberg Emerging Markets Local Bond ETF (EBND) | 0.30% | 6.2% |
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.”
Passive investors looking for a “Goldilocks” one-size-fits-all bond ETF will like BND. This ETF tracks the Bloomberg U.S. Aggregate Float Adjusted Index, which holds more than 11,000 Treasurys, mortgage-backed securities and investment-grade corporate bonds for a minimal 0.03% expense ratio.
Vanguard Short-Term Bond Index Fund 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.”
Vanguard’s offering for this segment is BSV, which offers comparable exposure to BND in terms of credit quality but at a much shorter average duration of just 2.6 years. Currently, the ETF pays a 4.4% yield to maturity, a measure of theoretical expected total returns. BSV charges a 0.04% expense ratio.
Vanguard Intermediate-Term Bond ETF (BIV)
“Intermediate-term bond ETFs 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 horizon.”
The next step up in terms of maturity from BSV is BIV. This ETF tracks the Bloomberg U.S. 5-10 Year Government/Credit Float Adjusted Index, giving it an average duration of 6.2 years and a 4.5% yield to maturity. It charges the same 0.04% expense ratio as BSV and maintains a similar average credit quality.
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.”
The long end of the yield curve can be targeted via BLV, which takes on substantial interest rate sensitivity with a 13.7-year duration. This makes the ETF poised to potentially outperform once rates begin to fall. BLV charges a 0.04% expense ratio and pays a 5% yield to maturity.
iShares MBS ETF (MBB)
“Mortgage-backed securities ETFs offer yields that are comparable to investment-grade corporate bonds, accompanied with high credit quality and monthly cash flows,” Francis says. For example, MBB is currently paying a 4.5% yield to maturity with the majority of its holdings rated “AA.”
The holdings in MBB are issued by agencies such as the Federal National Mortgage Association (Fannie Mae), the Federal Home Loan Mortgage Corp. (Freddie Mac) and the Government National Mortgage Association (Ginnie Mae). The ETF is also affordable, with a 0.04% expense ratio.
[READ: 7 Best Treasury ETFs to Buy Now]
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.”
Some bond ETFs like SGOV are able to achieve very low 30-day median bid-ask spreads of just 0.01%. In the case of SGOV, this is because the ETF focuses solely on Treasury bills, or T-bills, with less than three months to maturity. This provides SGOV with excellent safety and liquidity.
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.”
A great example of this mechanic in play is USIG, which despite holding a portfolio of more than 10,000 investment-grade corporate bonds manages to keep its 30-day bid-ask spread narrow at 0.02%. This ETF currently pays a 4.8% yield to maturity with an average duration of 6.8 years.
SPDR Bloomberg High Yield Bond ETF (JNK)
Moving below the “BBB” credit rating threshold takes investors from investment-grade bonds to high-yield bonds, also known as junk bonds. These securities have a higher risk of default, but also pay greater yields to compensate investors for taking on increased credit risk. To buy these bonds, consider JNK.
JNK tracks the Bloomberg High Yield Very Liquid Index, which as its name suggests screens potential issuers for strong liquidity. This helps the ETF maintain a narrow 30-day bid-ask spread of 0.01%. Investors can expect a 7.4% yield to maturity and an average duration of 3.1 years.
SPDR Bloomberg Emerging Markets Local Bond ETF (EBND)
Treasurys issued by the U.S. government might have excellent credit ratings, but it’s not universal for governments of other nations. Foreign bonds may be rated investment-grade but can also fall into the high-yield category depending on their creditworthiness. However, they can provide a higher yield.
To invest in foreign-issued government bonds without converting currency, investors can buy EBND. This bond holds sovereign bonds issued by nations like South Korea, China, Indonesia, Malaysia, Thailand, Brazil and more. Investors can expect a 6.4% yield to maturity and a duration of 6.3 years.
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9 of the Best Bond ETFs to Buy Now originally appeared on usnews.com
Update 09/09/24: This story was previously published at an earlier date and has been updated with new information.
