Do investors need bonds in their portfolios?
The question is, of course, a personal one. Investors with goals in the three- to 10-year range—say, buying a new home, retiring within the next decade, or sending your youngest who just started high school to college—likely do. Bonds are also favored by investors who may not be comfortable with being 100% in stocks, no matter their time horizons.
Exchange-traded funds focused on fixed-income securities can be excellent ways for investors to get exposure to bonds. Here are a few reasons:
- Many ETFs are transparent—they track indexes with very specific duration and credit-quality traits—and offer few surprises.
- The best ETFs are low-cost, which is even more important when investing in bonds than in stocks: Every extra point paid in expenses is one less point in return, and returns are typically tougher to come by with bonds than with stocks.
- ETFs are easy to buy and sell.
A good place to start your search for top bond ETFs is with the Morningstar Analyst Rating. ETFs that earn our highest rating—Gold—are those that we think are most likely to outperform over a full market cycle.
Here’s the list of the best bond ETFs in three main groups: core bond funds, short-term bond funds, and specialized bond funds.
6 Best Core Bond ETFs
These ETFs all land in one of the intermediate-term bond Morningstar Categories and earn our top Analyst Rating of Gold as of July 2022.
- Fidelity Total Bond ETF FBND
- iShares Core Total USD Bond Market ETF IUSB
- iShares Core U.S. Aggregate Bond ETF AGG
- SPDR Portfolio Aggregate Bond ETF SPAB
- Vanguard Tax-Exempt Bond ETF VTEB
- Vanguard Total Bond Market ETF BND
The highly rated ETFs on this list would be fine choices to anchor the bond portion of an investor’s portfolio, assuming the goals for the money are more than five years away.
IShares Core U.S. Aggregate Bond ETF, SPDR Portfolio Aggregate Bond ETF, and Vanguard Total Bond Market ETF are classified as intermediate-term core bond ETFs by Morningstar, which means they invest in a blend of U.S. investment-grade bonds, including government, corporate, and securitized debt. Meanwhile, Fidelity Total Bond ETF and iShares Core Total USD Bond Market ETF qualify as intermediate-term core-plus bond ETFs; in addition to investing in investment-grade U.S. bonds, these funds have more flexibility to also buy corporate high-yield bonds, bank loans, and emerging-markets debt.
Lastly, Vanguard Tax-Exempt Bond ETF is the top-rated municipal-bond ETF that Morningstar covers. It’s a good option for those who are investing in taxable accounts and are in high tax brackets. (Learn more about who municipal-bond funds work best for in ”What Are Municipal Bonds?”)
4 Best Short-Term Bond ETFs
These ETFs all land in the ultrashort bond or short-term bond categories and earn our top Analyst Rating of Gold as of July 2022.
- Pimco Enhanced Short Maturity Active ETF MINT
- Pimco Enhanced Short Maturity Active ESG ETF EMNT
- 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 are looking to invest in bonds but expect to tap into these investments in the next few years.
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Both Pimco Enhanced Short Maturity Active ETF and Pimco Enhanced Short Maturity Active ESG ETF qualify as ultrashort bond ETFs. The ETFs in this category favor high-quality bonds with durations of less than one year.
Vanguard Short-Term Corporate Bond ETF and Vanguard Short-Term Treasury ETF fall into our short-term bond and short government categories, respectively. As the category’s name suggests, short-term government ETFs focus exclusively on short-term bonds issued by the U.S. government, while short-term bond ETFs can invest in high-quality corporate bonds as well as government bonds. In both cases, the ETFs favor bonds with durations in the one- to three-year range.
4 Best Specialized Bond ETFs
These ETFs all land in one of Morningstar’s specialized bond categories and earn our top Analyst Rating of Gold as of July 2022.
- Schwab U.S. TIPS ETF SCHP
- Vanguard Long-Term Bond ETF BLV
- Vanguard Long-Term Corporate Bond ETF VCLT
- Vanguard Short-Term Inflation-Protected Securities ETF VTIP
The top-rated ETFs on this list are what we’d call “satellite” holdings in a bond portfolio. In other words, they aren’t core holdings, but an investor might hold these ETFs to round out a bond portfolio, to make a tactical move, or to serve some other specialized interest.
The list includes the two best bond ETFs for inflation protection, Schwab U.S. TIPS ETF and Vanguard Short-Term Inflation-Protected Securities ETF. Both ETFs land in our inflation-protected bond category and invest in securities that adjust their principal values in line with the rate of inflation, which may hold appeal for some investors today (particularly retirees) as inflation continues to run hot.
The other two specialized funds on the list, Vanguard Long-Term Bond ETF and Vanguard Long-Term Corporate Bond ETF, both concentrate on bonds with long durations, which means these ETFs are very sensitive to interest-rate changes and very volatile by bond-fund standards. They can be used as a way to benefit from falling interest rates or as a tool for matching long-term liabilities.
How to Find More Top-Ranked ETFs
ETFs are often equated with low-cost indexing. But the ETF marketplace has grown increasingly complicated. Some ETFs track a very narrow part of the market or pursue specific themes. Some ETFs invest based on a particular factor or a combination of them. And now there are even actively managed ETFs. To help figure out which ETFs are best for you, read Morningstar’s Guide to ETFs. Investors specifically looking for top stock ETFs can check out The Best Equity ETFs, too.
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Investors who’d like to be more hands-on and find ETFs based on their own selection criteria can use our new Morningstar Investor Screener. The tool, which is available to Morningstar Investor members, allows investors to screen ETFs based on various criteria, including asset class, Morningstar Category, Analyst Rating, and fee level. Morningstar Investor members also have access to the full list of highly rated ETFs.
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