Introduction
Welcome to Simple Investing Secrets, your go-to resource for investment insights and strategies aimed at achieving financial freedom. Unlocking the Power of Top Bond ETFs: 9 Best Picks for 2024. In this article, we will explore the 9 best bond ETFs that are worth your money today. As the market continues to evolve, understanding the importance of bonds in your portfolio is essential for stability and risk management. Let’s dive into the world of bond ETFs and discover how they can enhance your investment strategy.
Why Bonds Matter
Now, let’s get started. It’s essential to understand how bonds can provide stability and balance amidst the allure of rising stock prices. So let’s break it down in clear terms.
The Importance of Bonds in a Portfolio
- Why bonds matter
- How they can protect your investments
- Which bond exchange-traded funds (ETFs) you should consider
Bonds’ Role in a Well-Rounded Investment Portfolio
As the ongoing market surge from 2023 extends into 2024, it’s crucial to recognise the vital role bonds play in a well-rounded investment portfolio, especially amid the allure of surging stock prices. Unlocking the Power of Top Bond ETFs: 9 Best Picks for 2024
Recency Bias and Bonds
Overlooking bonds, a common pitfall influenced by recency bias, the tendency to overly weigh recent events, can distort perceptions of risk and reward. While high returns may seem enticing, for most investors, including those with lower risk tolerance, including bonds in their portfolio is essential for significant diversification benefits. For instance, investing in the best bond ETFs can provide such protection.
Benefits of Bonds: Reducing Volatility and Drawdowns
Bonds are particularly effective in reducing volatility, the fluctuation in investment returns over time, and mitigating drawdowns, which indicate the peak to trough decline in investment value over a specific period. Opting for low-risk bond ETFs is a great way to reduce this risk.
Historical Performance of Bonds During Market Crises
The significance of bonds isn’t just traditional wisdom; it’s a proven strategy evident across various market crises. For instance:
- A portfolio solely invested in U.S. stocks suffered significant losses during major market downturns, dropping by:
- 29.3% during Black Monday in 1987
- 44.1% during the dot-com crash starting in March 2000
- 50.9% during the subprime crisis in November 2007
- 20.9% during the COVID-19 market turmoil in March 2020
In contrast, a balanced and diversified portfolio, comprising 60% U.S. stocks and 40% U.S. aggregate bonds, experienced much milder declines—19.2%, 21.7%, 30.7%, and 11.9%, respectively. Investment-grade bond ETFs played a significant role in shielding investors during these downturns. Unlocking the Power of Top Bond ETFs: 9 Best Picks for 2024
Bond ETFs: A Diversification Tool
For investors recognising the protective value of bonds, the current market provides accessible avenues to diversify through bond ETFs. Bond ETFs primarily invest in fixed-income securities like government, corporate, and municipal bonds, explains Wes Moss, managing partner and chief investment strategist at Capital Investment Advisors. These funds are favoured by retail investors for their diversification, professional management, and income potential. If you’re just getting started, consider low-fee bond ETFs for beginners.
Advantages of Bond ETFs Over Individual Bonds
Bond ETFs address common concerns associated with investing in individual bonds, such as:
- High minimum investment requirements
- Complexity of bond-laddering strategies for maturity diversification
- Less liquid nature of the bond market
Additionally, bond ETFs offer the advantages of:
- Volatility reduction
- Monthly income generation at a low cost
This makes them an appealing choice for investors aiming to balance their portfolios in today’s unpredictable market.
Top Bond ETFs
Nine Recommended Bond ETFs
Here are nine recommended bond ETFs for consideration today.
Number 1: iShares Core U.S. Aggregate Bond ETF
One of the most widely used benchmarks in the bond market is the Bloomberg U.S. Aggregate Bond Index. It monitors various types of bonds, including:
- Government treasuries
- Mortgage-backed securities (MBS)
- Investment-grade corporate bonds
To follow this index, investors can purchase the iShares Core U.S. Aggregate Bond ETF with a minimal expense ratio of 0.03%. Currently, iShares offers an average yield to maturity of 4.8%. This represents the expected theoretical return if the underlying bonds are held until maturity.
The ETF also has a duration of 6.1 years. Duration indicates the sensitivity of the ETF’s price to changes in interest rates. Specifically, a 100-basis-point shift in interest rates would result in a 6.1% inverse movement in price, assuming all other factors remain constant.
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Number 2: Vanguard Total International Bond ETF
This ETF provides exposure to the global bond market as it tracks the Bloomberg Global Aggregate Ex-USD Float Adjusted RIC Capped Index. This index encompasses various fixed-income securities from major markets worldwide, covering both government and corporate issuers.
Vanguard offers BNDX at a low expense ratio of 0.07%, making it an attractive option for investors seeking international diversification. Currently, Vanguard Total International Bond offers an average yield to maturity of 4.7% and has a duration of 7.3 years. Notably, Vanguard Total International Bond is also currency-hedged, which helps mitigate potential volatility arising from fluctuations in exchange rates.
Number 3: iShares iBoxx Dollar Investment-Grade Corporate Bond ETF
Daniel Ducena, Chief Investment Officer at Blue Chip Partners, emphasises the importance of liquidity in bond ETFs, the ease and speed of buying or selling securities without significant price differences. The liquidity of a bond ETF largely depends on the liquidity of the securities it holds. An excellent illustration of this concept is the iShares iBoxx.
Currently, iShares iBoxx investment-grade boasts a minimal 30-day median bid-ask spread of only 0.01%. Attributable to its benchmark, the market iBoxx USD Liquid Investment Grade Index, investors can anticipate a yield to maturity of 5.3%, a duration of 8.3 years, and an expense ratio of 0.14%.
Number 4: iShares iBoxx Dollar High-Yield Corporate Bond ETF
The bid-ask spread, indicative of the difference between buying and selling prices, may remain narrow for an ETF even if it experiences low trading activity. This phenomenon occurs especially in ETFs investing in highly liquid markets like:
- Investment-grade corporate debt
- U.S. Treasury bonds
Ducena explains that it’s crucial to consider this aspect when selecting bond ETFs, as a wider spread can translate to a less favourable initial purchase price. Nevertheless, certain bond ETFs outside these realms exhibit commendable liquidity.
Take iShares iBox High-Yield, for instance, which tracks high-yield bonds yet maintains a minimal 0.01% 30-day median bid-ask spread. iShares iBox High-Yield boasts a substantial 7.6% yield to maturity, a modest 3.3-year duration, and an expense ratio of 0.49%.
Number 5: Vanguard Mortgage-Backed Securities ETF
Dave Francis, an investment advisor and principal at Bartlett Wealth Management, suggests that Vanguard mortgage-backed securities provide yields similar to those of investment-grade corporate bonds. These ETFs come with:
- High credit quality
- Monthly cash flow generation
For a cost-effective way to invest in these bonds, consider Vanguard mortgage-backed securities. VMBS primarily invests in a portfolio of more than 1,200 bonds issued by three mortgage agencies:
- Ginnie Mae
- Fannie Mae
- Freddie Mac
Currently, investors can anticipate an average duration of 6.5 years and a yield to maturity of 4.6%. Like many Vanguard ETFs, VMBS offers affordability with an expense ratio of 0.04%.
Number 6: JPMorgan Ultra-Short Income ETF
Short-term bond ETFs like JPMorgan offer attractive yields, especially in times of elevated short-term interest rates, explains Francis. They also present the advantage of maintaining relatively higher yields, even as the Federal Reserve begins to lower overnight rates, which directly impacts yields on money market funds.
JPST diverges from typical ETFs by using active management rather than following an index. Its team actively selects a portfolio of high-quality short-term bonds to achieve a current high net yield to maturity of 5.4%, while keeping the duration low at 0.5 years. Despite this active approach, the ETF remains cost-effective with an expense ratio of 0.18%.
Number 7: Spyder Portfolio Short-Term Treasury ETF
The Spyder Portfolio Short-Term Treasury ETF focuses on investing in short-term bonds, which typically mature in less than three years. This characteristic renders them less susceptible to fluctuations in interest rates, making them particularly suitable for investors seeking a low-risk investment avenue with relatively steady returns.
A prime illustration of such an ETF is SPTS, which boasts a minimal expense ratio of 0.03%. This ETF mirrors the performance of the short end of the Treasury yield curve by tracking the Bloomberg 1 to 3-year U.S. Treasury Index. With 103 current bond holdings, it offers:
- An average yield to maturity of 4.5%
- A modest duration of 1.8 years
Moreover, it exhibits favourable liquidity, evidenced by a 0.03% 30-day median bid-ask spread.
Number 8: Spyder Portfolio Intermediate-Term Treasury ETF
These types of ETFs, referred to as intermediate-term bond ETFs, focus on investing in bonds with maturities ranging from 3 to 10 years. They strike a balance between risk and potential return, making them particularly suitable for investors with a medium-term investment horizon.
Spyder stands out as a low-cost option in this category. It closely tracks the performance of the Bloomberg 3 to 10-year U.S. Treasury Index, providing investors with exposure to the middle section of the Treasury yield curve. Currently, investors can anticipate:
- A yield to maturity of 4.2%
- A 5-year duration with SPTI
Furthermore, it boasts an exceptionally low expense ratio of just 0.03%, mirroring the affordability of SPTS.
Number 9: Spyder Portfolio Long-Term Treasury ETF
These ETFs focus on long-term bonds, typically with maturities exceeding 10 years. They tend to be highly responsive to changes in interest rates, making their returns more volatile, explains Moss. They are best suited for investors with a long-term investment outlook and a tolerance for elevated risk.
For those seeking exposure to the extended end of the Treasury yield curve, SPTL offers a solution. It mirrors the performance of the Bloomberg Long U.S. Treasury Index. With a yield to maturity of 4.5% and a duration of 15.3 years, it carries significant interest rate sensitivity. Additionally, it boasts a minimal expense ratio of just 0.03%.
Conclusion
Bonds are crucial for a well-rounded investment strategy, especially in today’s volatile market. Incorporating bond ETFs not only offers diversification but also helps reduce risk during downturns. The recommended bond ETFs provide a range of options, from U.S. aggregate bonds to international exposure, catering to various risk profiles and investment horizons. Whether you’re a seasoned investor or just starting, don’t underestimate the significance of bond ETFs in your portfolio. For more insights on finance and investing, subscribe to our website for updates on future content. Thank you for reading!