12 Best Bond ETFs to Buy
In this piece, we will take a look at the 12 best bond ETFs to buy. If you want to skip our introduction to the bond market and its significance in the global financial industry, then take a look at 5 Best Bond ETFs to Buy.
The bond market is one of the most consequential financial markets in the world. This is because while the stock market is generally reserved for firms seeking to raise capital to expand their business, the bond market is open to others who are seeking to generate funds. While companies generally issue fixed income securities, or bonds, to raise capital, finance acquisitions, or grow their operations, the bond market is also open to governments. It allows governments to issue debt to finance their operations, deficits, or other operations. Naturally, this also means that turmoil in the bond market can have national or even global implications particularly if the bonds issued are in the U.S. dollar and the country issuing them is not the United States.
This is because should the bondholders perceive an upcoming or ongoing shift in the global interest rate environment, then they can sell their bonds on the market. A greater need to sell the bonds coupled with low demand pushes down bond prices and increases their yield. This sentiment can also affect the issuing country's currency which can depreciate if the rising yields are perceived to be a signal of a country being unable to meet its debt repayment obligations. However, there can be turmoil in the market even if the debt is issued by the U.S., as has been the case for more than a year now in the wake of the Federal Reserve's rapid and aggressive interest rate hikes intended to break inflation's back.
Sharp rises in interest rates combined with further expectations of future rate hikes can also cause a spike in bond yields. This is because if the market believes that more rate hikes are in play, then investors might cut down their demand for debt securities as they hope to get bonds with better coupon payments which are issued with a higher benchmark rate in mind. While this is good for the bond investor, for those who are seeking to raise capital on the bond market, the developments aren't particularly rosy. Since the past year or so has been rather historic when it comes to interest rate hikes, we have several examples of the real world implications of disorder in the bond market as well.
The first of these is the turmoil in the regional banking industry in the U.S. earlier this year. One of the banks, Silicon Valley Bank, simply failed to meet its capital requirements as losses in the bond market made it write off significant amounts as it was forced to sell securities to meet liquidity needs. This made operations unfeasible and as a result, the bank collapsed. The second example is the turmoil in the real estate market, particularly in the office real estate sector. This sector requires large capital sums to fund big projects, and if interest rates are rising, then bond issuers are reluctant to issue debt since the rates might rise in the future and make them miss higher coupon payments. Not to mention, higher interest rates also make it expensive for firms to finance their operations, and in the worst case scenario, they can also default on their debt.
Shifting gears to take a look at the recent developments in the bond market, U.S. treasury yields continue to fluctuate with the mood swings of investors related to the future course of action that the Federal Reserve will take with respect to interest rate hikes or cuts. Right now, all that the market can think about is 'when' the Fed will start to reduce its interest rates. While even the central bank might now know the answer to this question, there are a couple of metrics that do influence the decision and these are also noted by bond investors. For instance, if these proverbial tea leaves point at a 'higher for longer' approach, then the yields rise as existing bonds drop in value. However, the opposite is true if there is reason to believe that the Federal Reserve is seriously considering a cut in its interest rates. The broader sentiment though seems to be shifting towards a less tight monetary policy, as data from the Commodity Futures Trading Commission shows that short positions taken on 10 and 5 year U.S. Government Bonds are on a downward movement, indicating that investors do not believe that there is significant room left for a drop in treasury bond value.
Quite an interesting time in the bond market we'd say, and perhaps one that is suitable to take a look at the best bond ETFs. We did that today, and some notable names are JPMorgan Ultra-Short Income ETF (NYSE:JPST), iShares TIPS Bond ETF (NYSE:TIP), and iShares 1-5 Year Investment Grade Corporate Bond ETF (NASDAQ:IGSB).
Photo by Sharon McCutcheon on Unsplash
Our Methodology
To compile our list of the best bond ETFs, we made a list of the 25 largest bond ETFs based on their net assets. Then, their five year annualized returns were determined, and the top 12 best bond ETFs are as follows. For bond ETFs with strong share price appreciation this year, you can check out 10 Best Performing Bond ETFs in 2023.
12 Best Bond ETFs to Buy
12. Vanguard Short-Term Bond Index Fund (NYSE:BSV)
Annualized Return Over 5 Years: 1.15%
Vanguard Short-Term Bond Index Fund (NYSE:BSV) is part of the Vanguard fund family and has a sizeable $59 billion in net assets. The fund was set up in 2006, and it tracks the performance of an index made of different U.S. Government bonds which range from one to five years of maturity. The ETF has invested in a whopping 2682 bonds and its average yield to maturity is 5% with an average coupon rate of 2.6%. The average duration of the bonds is 2.6 years and roughly two thirds of the investments are in U.S. Government bonds.
Along with iShares TIPS Bond ETF (NYSE:TIP), JPMorgan Ultra-Short Income ETF (NYSE:JPST), and iShares 1-5 Year Investment Grade Corporate Bond ETF (NASDAQ:IGSB), Vanguard Short-Term Bond Index Fund (NYSE:BSV) is a top bond ETF.
11. iShares iBoxx $ Investment Grade Corporate Bond ETF (NYSE:LQD)
Annualized Return Over 5 Years: 1.28%
iShares iBoxx $ Investment Grade Corporate Bond ETF (NYSE:LQD) is another multi billion dollar bond ETF. It has $33 billion in net assets and was set up in 2002. The ETF is part of the renowned iShares fund family, and as its title suggests, the fund invests in corporate bonds. The iShares iBoxx $ Investment Grade Corporate Bond ETF (NYSE:LQD)'s benchmark index is the Markit iBoxx USD Liquid Investment Grade Index with the average yield to maturity being 5.74%.
10. SPDR Bloomberg 1-3 Month T-Bill ETF (NYSE:BIL)
Annualized Return Over 5 Years: 1.53%
SPDR Bloomberg 1-3 Month T-Bill ETF (NYSE:BIL) is part of the SPDR State Street Global Advisors fund family. It has 30 billion in net assets and was set up in 2007. It is one of the shortest duration bond ETFs on our list, as the maximum maturity of the assets in its portfolio is 3 months. The average maturity of the portfolio is 1.2 months and the ETF also holds $320 million in cash.
9. Vanguard Tax-Exempt Bond Index Fund (NYSE:VTEB)
Annualized Return Over 5 Years: 1.54%
Vanguard Tax-Exempt Bond Index Fund (NYSE:VTEB) tracks the S&P National AMT-Free Municipal Bond Index and the Bloomberg Municipal Bond Index as its benchmark indexes. The ETF has invested in more than seven thousand bonds with their average maturity being 13.5 years. This leaves the ETF susceptible to investor sentiment about the duration for which higher rates will persist, with a longer duration acting as a negative catalyst for the shares.
8. iShares Short Treasury Bond ETF (NASDAQ:SHV)
Annualized Return Over 5 Years: 1.60%
iShares Short Treasury Bond ETF (NASDAQ:SHV) is part of the iShares fund family. It tracks the ICE Short US Treasury Securities Index and has $20 billion in net assets. When compared to some of the other ETFs on our list which often have thousands of holdings, the ICE Short US Treasury Securities Index (USD) is relatively limited with just 7 holdings. The portfolio's average yield to maturity is 5.43% and apart from the seven Treasury notes, the fund has significant cash holdings as well.
7. Vanguard Intermediate-Term Corporate Bond Index Fund (NASDAQ:VCIT)
Annualized Return Over 5 Years: 1.64%
The Vanguard Intermediate-Term Corporate Bond Index Fund (NASDAQ:VCIT) is part of the Vanguard fund family. It was set up in 2010 and has net assets of $41.7 billion. Like most other ETFs on our list, the fund has invested in thousands of securities. These are investment grade corporate bonds most of which have been issued by either financial or industrial firms.
6. iShares National Muni Bond ETF (NYSE:MUB)
Annualized Return Over 5 Years: 1.66%
iShares National Muni Bond ETF (NYSE:MUB) is an iShares fund with $34 billion in net assets. It tracks the ICE AMT-Free US National Municipal Index and has more than 5,000 holdings with an average yield to maturity of 3.71%. It primarily invests in bonds that are issued by U.S. city or state governments. It joins JPMorgan Ultra-Short Income ETF (NYSE:JPST), iShares TIPS Bond ETF (NYSE:TIP), and iShares 1-5 Year Investment Grade Corporate Bond ETF (NASDAQ:IGSB) in our list of the best bond ETFs to buy according to annualized returns.
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Disclosure: None. 12 Best Bond ETFs to Buy is originally published on Insider Monkey.
