Bond ETFs have the ability to reduce volatility and provide income at a reasonable cost.
The attraction of skyrocketing stock prices may have caused some investors to neglect the essential significance of bonds in a well-rounded portfolio as the market surge that started in 2023 continues into 2024.
This error can distort judgements of risk and reward since it is frequently the consequence of recency bias, which is the propensity to place undue emphasis on recent events over historical evidence.
Although there is no denying the allure of large returns, allocations to bonds are necessary for significant diversification benefits for all investors, even the most risk-tolerant ones.
Bonds are particularly important in mitigating drawdowns, which are the lowest point of an investment’s decrease over a given length of time, and volatility, which is the degree of fluctuation in investment returns over time.
Bonds are important; this is not just common sense; it is a strategy that has worked through many significant market crises.
A portfolio consisting solely of U.S. stocks, for instance, would have suffered substantial losses during major market downturns: falling 20.9% during the COVID-19 market turmoil in March 2020, 44.1% during the dot-com crash that started in March 2000, 29.3% during Black Monday in 1987, and 50.9% during the subprime crisis of November 2007.
A more well-balanced and diversified portfolio, consisting of 40% U.S. aggregate bonds and 60% U.S. equities, would have had significantly less severe declines: 19.2%, 21.7%, 30.7%, and 11.9%, respectively.
Today’s market provides an easy option to diversify through bond exchange-traded funds (bond ETFs) for investors who understand the protective value that bonds offer.
“The primary investments made by bond ETFs are in fixed-income securities, which include corporate, municipal, and government bonds, among other debt instruments,” explains Wes Moss, Capital Investment Advisors’ chief investment strategist and managing partner. “These funds are popular among retail investors because they offer diversification, professional management and the potential for income generation.”
Bond ETFs cover a wide range of typical issues that investors have when buying individual bonds, including the high minimum investment amounts, the intricacy of bond laddering techniques for maturity diversification, and the bond market’s frequently lower liquidity.
Bond ETFs are also a cost-effective way for investors to generate monthly income and reduce volatility in an unpredictable market, which makes them a desirable choice for those looking to balance their portfolios.
The top nine bond ETFs available right now are as follows:
| ETF | EXPENSE RATIO | YIELD TO MATURITY |
| iShares Core U.S. Aggregate Bond ETF (ticker: AGG) | 0.03% | 4.8% |
| Vanguard Total International Bond ETF (BNDX) | 0.07% | 4.7% |
| iShares iBoxx $ Investment Grade Corporate Bond ETF (LQD) | 0.14% | 5.3% |
| iShares iBoxx $ High Yield Corporate Bond ETF (HYG) | 0.49% | 7.6% |
| Vanguard Mortgage-Backed Securities ETF (VMBS) | 0.04% | 4.6% |
| JPMorgan Ultra-Short Income ETF (JPST) | 0.18% | 5.4% |
| SPDR Portfolio Short Term Treasury ETF (SPTS) | 0.03% | 4.5% |
| SPDR Portfolio Intermediate Term Treasury ETF (SPTI) | 0.03% | 4.2% |
| SPDR Portfolio Long Term Treasury ETF (SPTL) | 0.03% | 4.5% |
1. iShares Core U.S. Aggregate Bond ETF (AGG)
The Bloomberg U.S. Aggregate Bond Index, which measures government-issued Treasuries, mortgage-backed securities, or MBS, and investment-grade corporate bonds, is one of the most widely used benchmarks for the bond market. Investors can purchase AGG at a 0.03% expense ratio in order to track this index.
As of right now, AGG’s average yield to maturity, or the projected return assuming the underlying bonds are held to maturity, is 4.8%. With a 6.1-year term, the ETF will, under all other circumstances, see an inverse price movement of 6.1% in response to a 100 basis point change in interest rates.
2. Vanguard Total International Bond ETF (BNDX)
The Bloomberg Global Aggregate ex-USD Float Adjusted RIC Capped Index is the globally diversified equivalent of the Bloomberg U.S. Aggregate Bond Index. This index focuses on global key fixed-income markets, including both corporate and government issuers.
Vanguard provides BNDX at a low expense ratio of 0.07% to track this index. At the moment, investors can anticipate a 7.3-year duration and an average yield to maturity of 4.7%. Crucially, BNDX is likewise currency hedged to reduce negative volatility caused by exchange rate swings.
3. iShares iBoxx $ Investment Grade Corporate Bond ETF (LQD)
According to Daniel Dusina, chief investment officer of Blue Chip Partners, “liquidity—the ability to buy or sell the security quickly, easily, and without a large spread—is often overlooked in bond ETFs.” “A bond ETF’s liquidity, for the most part, is driven by the liquidity of its underlying securities.”
LQD is a prime illustration of this process in action; because of its benchmark, the Markit iBoxx USD Liquid Investment Grade Index, it currently has a low 30-day median bid-ask spread of just 0.01%. A 5.3% yield to maturity, an 8.3-year term, and a 0.14% expense ratio are what investors can anticipate.
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4. iShares iBoxx $ High Yield Corporate Bond ETF (HYG)
“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,” explains Dusina. “This is important to be aware of when choosing bond ETFs, as a large spread can equate to a worse initial purchase price.”
Bond ETFs that don’t fit within these categories do, nevertheless, still offer good liquidity. HYG is one example; it follows high-yield bonds and still maintains a low 30-day median bid-ask spread of 0.01%. HYG offers a low duration of 3.3 years, a high yield to maturity of 7.6%, and an expense ratio of 0.49%.
5. Vanguard Mortgage-Backed Securities ETF (VMBS)
Investment advisor and principal at Bartlett Wealth Management Dave Francis says MBS ETFs “offer yields that are comparable to investment-grade corporate bonds, accompanied with high credit quality and monthly cash flows.” Think into VMBS for reasonably priced exposure to these bonds.
VMBS’s primary holdings include more than 1,200 bonds that are issued by Ginnie Mae, Fannie Mae, and Freddie Mac, three mortgage companies. At the moment, investors can anticipate a 4.6% yield to maturity and an average duration of 6.5 years. With a 0.04% expense ratio, VMBS is reasonably priced, similar to many other Vanguard ETFs.
6. JPMorgan Ultra-Short Income ETF (JPST)
“Short-term bond ETFs like JPST have compelling yields, which will do well while short-term rates remain high,” says Francis. “They also have the benefit of providing higher rates, even as the Federal Reserve begins reducing the overnight rates, which will immediately impact the yields on money market funds.”
There is no index that this ETF tracks. Rather, the team at JPST deliberately chooses a portfolio of premium short-term bonds to provide a current high net yield to maturity of 5.4% while maintaining a short duration of 0.5 years. With a cost ratio of 0.18%, the ETF is reasonably priced even with active management.
7. SPDR Portfolio Short Term Treasury ETF (SPTS)
“Short-term bond ETFs typically invest in bonds with maturities of less than three years, making them less sensitive to interest rate changes,” Moss explains. “They are suitable for investors who want a low-risk investment option with relatively stable returns.” SPTS is an inexpensive example; its fee is 0.03%.
Using the Bloomberg 1-3 Year U.S. Treasury Index, this ETF covers the short end of the Treasury yield curve. Its 103 current bond holdings have a low duration of 1.8 years and an average yield to maturity of 4.5%. With a 30-day median bid-ask spread of 0.03%, it is also reasonably liquid.
8. SPDR Portfolio Intermediate Term Treasury ETF (SPTI)
“Intermediate-term bond ETFs typically invest in bonds with maturities between three and 10 years,” Moss explains. “They offer a balance between risk and return and are suitable for investors who have a medium-term investment horizon.” Here, SPTI is the cheap SPDR ETF to keep an eye on.
Investors who purchase this ETF will have exposure to the middle of the Treasury yield curve as it tracks the Bloomberg 3-10 Year U.S. Treasury Index. At the moment, investors can anticipate a five-year duration and a 4.2% yield until maturity. Similar to SPTS, SPTI has an expenditure ratio of 0.03% and is highly inexpensive.
9. SPDR Portfolio Long Term Treasury ETF (SPTL)
“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 states. “They are suitable for investors who have a long-term investment horizon and can tolerate higher levels of risk.”
SPTL, which tracks the Bloomberg Long U.S. Treasury Index, is an option for investors seeking exposure to the long end of the Treasury yield curve. Because of its 15.3-year duration and 4.5% yield to maturity, this exchange-traded fund exhibits considerable interest rate sensitivity. Additionally, its expense ratio is a modest 0.03%.
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Risks associated with investing in bond ETFs
Bond ETF investing carries certain inherent risks, chief among which is interest rate risk, which is the phenomenon wherein bond prices respond negatively to changes in interest rates. ETFs with longer durations are more vulnerable. The possibility of issuer defaults affecting bond values gives rise to credit risk. When ETFs encounter difficulties trading in the secondary market, liquidity risk appears and may have an impact on price execution. ETFs use tactics like duration management, derivatives utilization, and diversification across maturities to control interest rate risk. Credit risk is reduced by carefully choosing issuers and taking credit quality into account. By keeping an eye on market conditions and utilizing a variety of liquidity sources, liquidity risk is reduced.
Evaluating different ETFs’ risk management strategies is part of the comparison process. Investors ought to evaluate credit quality, average duration, and the efficacy of hedging techniques. Analyzing past performance under different market scenarios helps determine how risk-averse an ETF is. Comparing fees and spending ratios is also essential. Investors looking for a balanced risk-return profile could find an ETF with competitive fees and a comprehensive risk management approach more appealing.
Top ETFs to Buy Right Now 2024
Investment Strategies
Bond ETFs provide investors with flexibility when incorporating them into their investment strategy to achieve a variety of goals. Bond ETFs generate income through regular interest payments, which makes them a good option for retirees or others looking for steady cash flow. By taking advantage of bonds’ comparatively lower volatility when compared to stocks, investors seeking to preserve capital can devote a portion of their portfolio to bond exchange-traded funds (ETFs). Bond ETFs can also protect investments during erratic times by acting as a buffer against market declines.
Bond ETFs provide exposure to fixed income assets across a range of sectors, maturities, and credit quality, so aiding in portfolio diversification. Bonds with different risk profiles can be diversified amongst to lower overall portfolio risk while retaining potential benefits for investors. Since bonds and equities sometimes have negative correlations, diversification is especially beneficial during market downturns as it stabilizes portfolio performance.
When adopting bond ETFs, investors should evaluate their time horizon, investing goals, and risk tolerance. They can modify the mix of bond ETFs based on current market conditions and economic outlook to customize their allocation to match their goals. Consistent portfolio evaluation and rebalancing guarantee congruence with evolving financial objectives and risk appetites. All things considered, bond exchange-traded funds (ETFs) provide investors looking to diversify, preserve money, and earn income from their investments with a versatile instrument.
