Compared to individual bonds, bond exchange-traded funds can offer greater price transparency, better liquidity and lower fees. They pay out distributions monthly.
Bond ETFs come in different forms and can be categorized based on their strategy, geography, issuer, maturity and credit quality.
To identify the best bond ETFs of 2024, we reviewed stringent criteria, including the bond ETF’s level of diversification, expense ratios, total assets, liquidity and management style. This helped us identify bond ETFs that are passively managed, have low fees, possess excellent liquidity and total assets, and are suitable as core holdings for a variety of investor backgrounds.
Summary
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The best bond ETFs
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Vanguard Total Bond Market ETF (BND)
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Vanguard Total International Bond ETF (BNDX)
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iShares Core U.S. Aggregate Bond ETF (AGG)
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iShares Core Total USD Bond Market ETF (IUSB)
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Schwab U.S. Aggregate Bond ETF (SCHZ)
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SPDR Portfolio Aggregate Bond ETF (SPAB)
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iShares Core International Aggregate Bond ETF (IAGG)
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Compare the best bond ETFs
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Methodology
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Final verdict
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What is a bond ETF?
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How to choose a bond ETF?
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How do bond ETFs work?
The best bond ETFs
Vanguard Total Bond Market ETF (BND)
Expense ratio
0.03%
Total assets
$104 billion
What you should know
Vanguard’s flagship aggregate bond ETF BND has been around since 2007, providing investors with affordable and transparent exposure to more than 10,000 bonds.
“ETFs like BND provide easy, single-purchase exposure to the largest swath of the U.S. bond market, covering U.S. Treasurys, mortgage-backed securities and corporate bonds,” says John Croke, head of active fixed income product management at Vanguard. For a 0.03% expense ratio, which works out to $3 in annual fees on a $10,000 investment, you’ll receive exposure to high-quality bonds suitable for those with a medium- to long-term time horizon.
Pros and cons
Pros
- Exposure to government and corporate bonds.
- More than 65% of the portfolio is held in the lowest credit risk government bonds.
- A very low expense ratio.
Cons
- A intermediate duration can lead to losses when interest rates rise.
- A low exposure to foreign bonds.
- No exposure to noninvestment–grade bonds.
More details
- Category: U.S. aggregate fixed income.
- Yield to maturity: 4.85%.
- 5-year annualized rate as of May 1: 0.37%.
Vanguard Total International Bond ETF (BNDX)
Expense ratio
0.07%
Total assets
$53.5 billion
What you should know
Investors often diversify their stock allocation internationally, and doing so on the bond side can be a smart move as well. By holding international bonds, you can hedge against shocks to the U.S. bond market, such as a rapid rise in interest rates or inflation. Because inflation and interest rates in other countries might move at different times and speeds, diversifying bonds internationally can capture benefits.
An easy way to access over 6,800 government and investment-grade corporate bonds from European, Pacific and emerging markets is via BNDX, which tracks the Bloomberg Global Aggregate Ex-USD Float Adjusted RIC Capped Index. BNDX offers a cost-effective way of buying these bonds without currency conversion or an in-depth understanding of global bond trading.
Pros and cons
Pros
- Diversified internationally.
- Diversified among government and corporate issuers.
- A higher yield to maturity than BND.
Cons
- A longer duration and greater interest rate risk than BND.
- A higher expense ratio than U.S.-only bond ETFs.
- A slightly higher bid-ask spread than BND and AGG.
More details
- Category: International aggregate fixed income.
- Yield to maturity: 4.85%.
- 5-year annualized rate as of May 1: 0.32%.
Schwab U.S. Aggregate Bond ETF (SCHZ)
Expense ratio
0.03%
Total assets
$7.4 billion
What you should know
Another ETF that investors can use to track the Bloomberg U.S. Aggregate Bond Index is SCHZ. Like BND and AGG, SCHZ features an average intermediate duration and tracks a similar portfolio of government and investment-grade corporate bonds. It also charges a low expense ratio of 0.03%, which is one of the cheapest expense ratios for bond ETFs.
Pros and cons
Pros
- A very low expense ratio.
- Exposure to government and corporate bonds.
- Around 75% of the portfolio is held in AAA-rated bonds.
Cons
- A slightly higher bid-ask spread than AGG and BND.
- A low international diversification.
- No noninvestment-grade bonds held.
More details
- Category: U.S. aggregate fixed income.
- Yield to maturity: 4.53%.
- 5-year annualized rate as of May 1: 0.27%.
SPDR Portfolio Aggregate Bond ETF (SPAB)
Expense ratio
0.03%
Total assets
$7.8 billion
What you should know
The Bloomberg U.S. Aggregate Bond Index is a popular index that many bond ETFs track. Another option in this space is SPAB, which is part of State Street Corporation’s “SPDR Portfolio” suite of ETFs. These ETFs are intended to serve as low-cost core building blocks for portfolios. To remain competitive with BND, AGG and SCHZ, SPAB charges the same low expense ratio of 0.03%. Otherwise, it has a similar portfolio and duration.
Pros and cons
Pros
- A very low expense ratio.
- An exposure to government and corporate bonds.
- Around 40% of the portfolio is held in U.S. Treasury bonds.
Cons
- A higher bid-ask spread than other ETFs on the list.
- Virtually no international diversification.
- No noninvestment-grade bonds held.
More details
- Category: U.S. aggregate fixed income.
- Yield to maturity: 4.84%.
- 5-year annualized rate as of May 1: 0.26%.
Compare the best bond ETFs
| FUND | EXPENSE RATIO | TOTAL ASSETS | CATEGORY |
|---|---|---|---|
Vanguard Total Bond Market ETF (BND) | 0.03% | $104 billion | U.S. aggregate fixed income |
Vanguard Total International Bond ETF (BNDX) | 0.07% | $53.5 billion | U.S. fund global bond-USD hedged |
iShares Core U.S. Aggregate Bond ETF (AGG) | 0.03% | $105.1 billion | U.S. aggregate fixed income |
iShares Core Total USD Bond Market ETF (IUSB) | 0.06% | $27.6 billion | U.S. aggregate fixed income |
Schwab U.S. Aggregate Bond ETF (SCHZ) | 0.03% | $7.4 billion | U.S. aggregate fixed income |
SPDR Portfolio Aggregate Bond ETF (SPAB) | 0.03% | $7.8 billion | U.S. aggregate fixed income |
iShares Core International Aggregate Bond ETF (IAGG) | 0.07% | $5.8 billion | International aggregate fixed income |
Methodology
Our curated rankings of the top bond ETFs were created by screening bond ETFs for several must-have metrics:
Total assets: Each bond ETF on this list must have accrued total assets of at least $1 billion. A higher amount of total assets indicates greater investor interest, ETF popularity and an economy of scale.
Expense ratio: Each bond ETF screened has a net expense ratio under 0.1%. These fees are deducted directly from the gross returns of the bond ETF, so keeping them low helps to maximize overall returns.
Management style: All bond ETFs on this list track the returns of an underlying benchmark index. They are not actively managed based on the fund manager’s discretion or a quantitative framework.
Diversification: Bond ETFs on this list must hold bonds from government and corporate issuers, of all maturities and all investment-grade credit ratings. This ensures exposure to aggregate bond ETFs, which offer a high degree of diversification.
Liquidity: All bond ETFs on this list have a 30-day median bid-ask spread lower than 0.05%. “The bid-ask spread is important to be aware of when identifying bond ETFs, as a large spread can equate to a significantly worse initial purchase price or final sale price,” says Daniel Dusina, director of investments at Blue Chip Partners.
This set of criteria produced a list of bond ETFs that may be suitable holdings for a broad investor demographic over the long term. The selected bond ETFs all boast broad diversification across issuers, maturities, credit quality and geography, making them excellent core building blocks for the bond allocation in a portfolio. They also feature low fees and high AUM, with excellent liquidity, helping investors minimize drag from expense ratios and bid-ask spreads. Finally, they are all passively managed, minimizing the degree to which they underperform their index benchmarks over the long term.
An experienced ETF analyst selected the funds above, but they may not be right for your portfolio. Before purchasing any of these funds, do plenty of research to ensure they align with your financial goals and risk tolerance.
Why other funds didn’t make the cut
For this ranking, we decided to exclude actively managed bond ETFs. These ETFs do not track a benchmark bond index. Rather, they actively pick and choose bonds according to the manager’s strategy or a quantitative methodology to try to outperform a benchmark.
While we recognize that some bond ETFs like the PIMCO Active Bond ETF (BOND) have historically outperformed their benchmarks, selecting ETFs based on past performance does not guarantee future outperformance. There is no guarantee that the actively managed bond ETF’s strategy or management team will continue to outperform in the future.
In addition, research from the 2022 SPIVA Scorecard by S&P Dow Jones Indices shows that over long periods, several types of actively managed bond funds consistently underperform their passive index counterparts. Notable highlights include the following:
- 78% of actively managed general government bond funds underperformed the iBoxx $ Domestic Sovereign and Sub-Sovereign index over the last 15 years.
- 93.81% of actively managed general investment-grade bond funds underperformed the iBoxx $ Liquid Investment Grade index over the last 15 years.
- 69.23% of actively managed general bond funds underperformed the iBoxx $ Overall index over the last 15 years.
This is not to say that actively managed bond ETFs are unworthy of consideration. Investors with objectives such as hedging interest rate risk, tax efficiency, generating higher yields or seeking inflation protection may find these funds worthwhile. For a short-term tactical strategy, actively managed bond ETFs have their uses. Nonetheless, the research from S&P Dow Jones Indices shows that passively managed bond funds outperform their actively managed counterparts in most categories over the long term.
Our rankings also excluded bond ETFs that were too narrow in scope in terms of issuer, credit quality and maturity. For example, we excluded bond ETFs that held only corporate bonds, junk bonds or short-term bonds. These bonds may be useful to investors with specific investment objectives but aren’t suitable as broad core portfolio holdings given they’re less diversified than aggregate bond ETFs.
Final verdict
Bond ETFs are an excellent way to gain fixed-income exposure in a portfolio. Compared to trading individual bond issues, bond ETFs tend to have great liquidity, better transparency and lower fees. With a single bond ETF, investors can diversify their fixed-income allocation in terms of issuer, geography, credit quality and maturities.
Our pick for the best bond ETF is AGG due to its rock-bottom expense ratio of 0.03% and minuscule 30-day median bid-ask spread of 0.01%. The ETF is highly popular among traders and investors alike and is frequently cited in the media as a benchmark for overall U.S. bond market performance. It provides exposure to government and corporate investment-grade bonds of all maturities with an overall intermediate duration, which is suitable for a range of investors.
What is a bond ETF?
A bond ETF is an open-ended fund that holds a portfolio of underlying bonds selected based on a benchmark index or a fund manager’s proprietary strategy.
Shares of a bond ETF trade on exchanges like stocks do and can be bought and sold intraday. When investors buy shares of a bond ETF, they receive exposure to the risks and returns of the ETF’s underlying bond portfolio. Investors who buy bond ETFs benefit from potential share price appreciation in the ETF along with periodic distributions.
How to choose a bond ETF?
Choosing the right bond ETF starts with an understanding of your investment objectives, time horizon and risk tolerance. There’s no boilerplate template. Investors must consider these circ*mstances holistically.
In general, those with conservative return expectations, a short time horizon and a low-risk tolerance may prefer lower volatility and interest rate risk for shorter-term bond ETFs. Those seeking higher yields over a long time horizon may prefer greater volatility and interest rate risk from corporate bond ETFs or long-term bond ETFs.
Here’s a list of the different types of bond ETFs that are available:
- Strategy: Bond ETFs can passively track an external index or be actively managed.
- Geography: Bond ETFs can hold bonds from issuers in different countries.
- Issuer: Bond ETFs can hold bonds issued by the government, such as U.S. Treasury bonds, Treasury Inflation-Protected Securities (known as TIPS) and municipal bonds. They can also be issued by corporate entities. Examples include investment-grade corporate bonds, high-yield bonds, junk bonds and convertible bonds.
- Maturity: Bond ETFs can hold bonds of varying maturities. For example, a short-term bond ETF may hold only bonds with a maturity of one to three years, while an intermediate-term bond ETF may hold bonds ranging from five to 10 years in maturity.
- Credit quality: The individual bonds in a bond ETF are rated by agencies, such as Standard & Poor’s (S&P), Moody’s and Fitch Ratings. In general, there are two rating categories: investment grade (BBB- and above from S&P) and noninvestment-grade (BB+ and below from S&P), also known as high-yield or junk bonds.
How do bond ETFs work?
Bond ETFs are more complex than equity ETFs due to the myriad metrics that govern their performance. Two of the more important metrics investors should understand are:
- Yield to maturity: This is the weighted average yield an investor would receive if they bought and held all the bonds in the ETF to maturity. This metric can be used as an estimate of the return an investor can expect gross of any fees.
- Duration: This metric estimates the interest rate sensitivity of a bond ETF. A bond ETF with a higher duration will have greater interest rate risk. For example, a bond ETF with a duration of 6.7 years can be expected to lose 6.7% in value if interest rates rise by 1%, all else being equal.
Many new bond investors were likely shocked in 2022 that their supposedly “safe” bond ETFs lost nearly as much value as stocks did. This is because most bond ETFs have an intermediate duration of around five to seven years. While some investors may have fled into short-duration bond ETFs as a result, this approach might not be the best long term.
“If your time horizon is greater than the typical five- to seven-year duration of these ETFs, you will have plenty of time to recover from any further potential shocks to interest rates, as these ETFs will continually reinvest in higher-yielding debt under such a scenario,” Croke says.
Frequently asked questions (FAQs)
No investor “needs” bonds in their portfolio, but having bonds can be a good idea for some types of investors.
Investors who find a 100% equity portfolio excessively volatile can use bond ETFs to bring volatility down.
A common approach is the balanced 60-40 portfolio of stock and bond ETFs. But remember that while bond ETFs have historically been lower risk than stocks, there have been occasions, such as in 2022, when they have lost substantial value. Finally, investors knowledgeable about individual bond issues may prefer buying them over bond ETFs.
The investing headline that defined 2022 was the bond bear market. As interest rates rose at aggressive paces not seen since the 1980s, bonds suffered losses that spelled the end of a 30-year bull market. However, with yields now sitting much higher than they were in previous years, there may be some tailwinds due for bonds.
“We are finally at a transition point where investors can again rely on bonds as a source of reliable income,” says Doug Dahmer, CEO and founder of Retirement Navigator, a retirement planning service. “Now that the (Federal Reserve) is putting further interest rate hikes on hold to reassess the economy, investors can return to bonds as a less volatile holding and benefit from the higher yields.”
