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Do investors need bonds in their portfolios?
The question is personal. Investors with goals within three to 10 years (for example, buying a new home, starting a business, or retiring within the next decade) likely need it. The same applies to those who are already retired. Bonds are also preferred by investors who do not want to invest 100% in stocks, regardless of their investment horizon.
Exchange-traded funds that focus on fixed income securities can be a good way for investors to gain exposure to bonds. Here are some reasons:
• Many ETFs are transparent – most track indexes with very specific maturity and credit characteristics – and offer few surprises.
• The best ETFs are cheap, which is even more important when investing in bonds than stocks: Any percentage more in fees means a percentage less return, and returns are generally harder to achieve with bonds than with stocks.
• ETFs are easy to buy and sell.
A good place to start when looking for the best bond ETFs is the Morningstar Medalist Rating. The highest-rated ETFs (Gold) are those that we believe are most likely to outperform across an entire market cycle.
Here is the list of the best bond ETFs, divided into three main groups: core bond funds, short-term bond funds and specialty bond funds.
The 5 Best Core US Bond ETFs to Buy Now
These ETFs all fall into one of Morningstar's intermediate-term bond categories and receive our highest Gold Medal Rating with 100% analyst coverage as of February 2024.
– Fidelity Total Bond ETF (FBND)
– iShares Core Total USD Bond Market ETF (IUSB)
– iShares Core US Aggregate Bond ETF (AGG)
– Vanguard Tax-Exempt Bond Index Fund (ETF)
– VTEB Vanguard Total Bond Market ETF (BND)
The top-rated ETFs on this list would be excellent choices for hedging the bond portion of an investor's portfolio, provided the investment goals are more than five years away.
iShares Core US Aggregate Bond ETF And Vanguard Total Bond Market ETF are listed by Morningstar as intermediate-term core bond ETFs, meaning they invest in a mix of investment-grade U.S. bonds, including government bonds, corporate bonds and securities. Fidelity Total Bond ETF And iShares Core Total USD Bond Market ETF are listed as medium-term core-plus bond ETFs. In addition to investing in investment-grade U.S. bonds, these funds have greater flexibility to also purchase high-yield corporate bonds, bank loans and emerging market debt.
Finally, this Vanguard tax-exempt bond ETF is the highest-rated municipal bond ETF covered by Morningstar. This is a good option for those who invest in taxable accounts and are in high tax brackets.
If none of these ETFs are right for you, see The Best ETFs and Where They Place in Your Portfolio for other top-rated ETFs.
7 Best Short-Term US Bond ETFs in 2024
These ETFs all fall into the Ultra-Short Bond or Short-Term Bond categories and receive our highest Gold Medal Rating with 100% analyst coverage as of February 2024.
– JP Morgan Limited Duration Bond ETF (JPLD)
-Pimco Enhanced Short Maturity Active ESG ETF (EMNT)
-Pimco Enhanced Short Maturity Active ETF (MINT)
-Schwab Short-Term US Treasury ETF (SCHO)
-SPDR Portfolio Short Term Treasury ETF (SPTS)
-Vanguard Short-Term Corporate Bond ETF (VCSH)
-Vanguard Short-Term Treasury ETF (VGSH)
The top-rated ETFs on this list are good choices for those who want to invest in bonds but plan to use these investments in the next few years.
THE Pimco Enhanced Short Maturity Active ETF and that Pimco Enhanced Short Maturity Active ESG ETF Both can be considered ultra-short-term bond ETFs. ETFs in this category prefer high-quality bonds with a maturity of less than one year.
THE Vanguard Short-Term Corporate Bond ETF belongs to the category of short-term bonds, while the Schwab Short-Term US Treasury ETF and that Vanguard Short-Term Treasury ETF both belong to the category of short-term government bonds. As the category name suggests, short-term government ETFs focus exclusively on short-term U.S. government bonds, while short-term bond ETFs may also invest in high-quality corporate bonds rather than Treasury bonds. In both cases, ETFs prefer bonds with a maturity between 1 and 3 years.
The 6 best ETFs specializing in US bonds
These ETFs all fall into one of Morningstar's specialty bond categories and have received our highest Gold Medal rating with 100% analyst coverage since February 2024.
– Schwab US TIPS ETF (SCHP)
– T. Rowe Price Floating Rate ETF (TFLR)
-Vanguard Intermediate-Term Corporate Bond ETF (VCIT)
-Vanguard Long-Term Bond ETF (BLV)
– Vanguard Long-Term Corporate Bond ETF (VCLT)
– Vanguard Short-Term Inflation-Protected Securities ETF (VTIP)
The highest-rated ETFs on this list are so-called “satellite” positions in a bond portfolio. In other words, these are not core holdings, but an investor can hold these ETFs to supplement a bond portfolio, undertake a tactical restructuring, or fulfill another specific interest.
The list includes the two best bond ETFs for inflation protection: Schwab US TIPS ETF And Vanguard Short-Term Inflation-Protected Securities ETF. Both fall into the category of inflation-protected bonds and invest in securities whose principal value is adjusted according to the rate of inflation, which may be of interest to some investors (particularly retirees).
The other funds on the list favor different types of bonds (corporate bonds, floating rate securities). Long-term funds, such as Vanguard Long-Term Bond ETF and that Vanguard Long-Term Corporate Bond ETF, are very sensitive to interest rate changes and are very volatile compared to bond funds. They can be used to benefit from falling interest rates or as a long-term debt protection tool.