10 Best Bond ETFs Of May 2024 (2024)

Bonds are a core component of any well-diversified investment portfolio. Their role is two-fold: To generate income and bolster returns during market declines. In 2022, bonds reminded investors of their utility as shock-absorbers, with most fixed income categories losing less ground than the broader stock market. (But not this year.)

Still, whether you’re age 20 or 70, you’ll want at least some exposure to bond ETFs in your portfolio for the long run. That is, unless you can stomach a potentially big decline in value when the stock market experiences one of its inevitable drops.

Bond values move inversely to interest rate changes. When interest rates rise, bond values decline, and vice versa. With interest rates projected to keep rising under present conditions, It’s important to keep bond ETF maturities to the short term (one to three years) or intermediate term (two to 10 years). That’s because shorter-term bond investments are less exposed to rising rates.

“Duration” describes the vulnerability of a bond or ETF to interest rate changes. It describes how much your fund value will change with a 1% change in interest rates. For example, a three-year bond ETF duration means when interest rates increase by 1%, the fund price typically falls 3%, and vice versa.

With a mind on constructing our list of best bond ETFs so that it offers portfolios for a variety of investors, we’ve included active, passive, corporate, government and international bond ETFs.

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• The 10 Best Bond ETFs of May 2024
• Pimco Active Bond Exchange-Traded Fund (BOND)
• Vanguard Intermediate-Term Treasury Index Fund ETF (VGIT)
• Pimco Enhanced Short Maturity Active ESG ETF (EMNT)
• ProShares Investment Grade-Interest Rate Hedged ETF (IGHG)
• iShares National Muni Bond ETF (MUB)
• iShares 0-5 Year TIPS Bond ETF (STIP)
• Vanguard Total International Bond ETF (BNDX)
• SPDR Portfolio Corporate Bond ETF (SPBO)
• SPDR Portfolio High Yield Bond ETF (SPHY)
• SPDR Portfolio Long Term Corporate Bond ETF (SPLB)
• Methodology
• What Are Bond ETFs?
• How Do Bond ETFs Work?
• How To Invest in Bond ETFs
• Best Times To Buy Bond ETFs
• Are Bond ETFs Safe?
• Next Up In Investing

*All data sourced from Morningstar Direct, current as of May 2, 2024, unless noted otherwise.

Forbes Advisor’s goal is to provide a list of bond ETFs suitable for the current economic environment with reasonable expense ratios. We sought out strong performers, from quality fund families. Indeed, our list of bond ETFs spans diverse corners of the fixed income universe.

We began with 237 of the top-ranked Morningstar U.S.bond ETFs. We excluded funds with Morningstar rankings of neutral or lower, and management fees above 0.60%.

Next, we sorted based on returns. We introduced diversity by including some funds that are actively managed and some that are passively. We further assured diversity by including corporate, government, municipal and international funds. Finally, we mostly chose short- and intermediate-term ETFs to minimize interest rate risk. Yet we included one long-term bond fund.

The final list of 10 bond ETFs offers categorical diversity among funds expected to deliver strong risk adjusted returns now and going forward.

An exchange traded fund (ETFs) is a security that combines the punching power of individual stocks with the diversification of mutual funds. The exchange traded part of the name refers to how these securities are bought and sold on the market like stocks. The fund part signals that an ETF provides easy access to diversification and exposure to a wide variety of asset classes.

A bond exchange-traded fund is an ETF that invests only in fixed income securities. It gives you the income from many bonds. And in typical ETF fashion, it gives you the safety of diversification.

That diversification stems from the fact that the ETF holds many bonds. It also stems from the variety of types of bonds the ETF owns, which can range from U.S. Treasuries to corporate bonds. An ETF can also provide diversification of other traits. For example, an ETF may hold bonds with different holding periods, from short-term to long-term. An ETF may also hold bonds with different credit ratings. As a result, some bonds in an ETF portfolio might be high-yield. Other bonds in the same fund might offer lower yields.

And some bond ETFs are actively managed, while others are passively managed because they track a specific index.

The idea behind an ETF is that it is intended to track as closely as it can the price of an index or a collection of assets such as bonds. The financial firm that runs an ETF buys those assets—in this case, a bundle of bonds—that populate the fund. That firm then sells shares in the fund to investors. Those shares are supposed to reflect the value of the fund. And those shares can be traded on an exchange, just like individual bonds or stocks or mutual funds.

When you invest in an ETF, you own shares in the fund, not in the underlying assets. The financial services firm that runs the ETF owns the assets. And that firm adjusts the number of ETF shares outstanding—that is, owned by investors like you—in an ongoing effort to keep their prices in line with the value of the underlying assets or index.

When talking about bond investing, it’s important to understand that as interest rates increase, the market value of a bond declines.

A given bond’s sensitivity to interest rate changes depends on its duration. The value of shorter-duration securities, typically short- and intermediate-term bonds, are less sensitive to interest rate changes. That means their prices are more stable when interest rates are rising, like now.

And what exactly do bond investors mean by “duration”? Start with the fact that “duration” does not mean the same thing as “maturity,” even though both words seem to refer to a period of time. In the world of investing, maturity refers to the date when a bond’s principal is repaid with interest. Duration describes the expected price decline of a bond or bond ETF for each 1% rise in interest rates. Let’s say you read an investment report about a particular bond or bond ETF. The report says the bond or the fund has a duration (often called average effective duration in the case of a fund) of 3.5 years. That means you can expect the bond or ETF to fall in value by 3.5% for each 1% rise in interest rates, and vice versa.

Ask yourself this: since the market value of a bond declines as interest rates increase, do bond issuers need to offer higher rates to attract bond buyers as interest rates climb? Answer: that’s true, but it only applies to new issues. Existing bonds are stuck with their prior, lower interest rates. They can’t respond to rising interest rates by lifting their payouts.

What does that mean for you as an investor? Does it help you decide when you should buy bonds?

You don’t want to get stuck with older bonds whose yield is lower than newer bonds. You want to get rid of older, lower paying bonds amid rising rates. In contrast, But short-term bonds are closer to their maturity date, the date when they pay back your principal, typically with interest. So amid rising rates, you are penalized less for owning short-term bonds. You’re about to get your money back, and then you can reinvest in newer, higher yielding bonds.

That’s why shorter-term bonds hold their value better in periods when rates rise.

That concept also applies to bond ETFs. A short-term bond ETF holds bonds whose maturities are nearer, so their values fall in value less than longer-term bonds. That makes the ETF itself less volatile, less vulnerable to downswings.

And you might be surprised to learn that during prior periods of rising interest rates, total bond returns were quite favorable. Bond ETF owners should focus on cash flow during the next year or so until bond prices stabilize.

Are bond ETFs safe? Generally, yes. All securities, including bonds and bond ETFs, have ups and downs. But bonds tend to be less volatile than stocks and often perform better during economic downturns than many other financial assets. The same goes for bond ETFs.

Still, bonds and bond ETFs carry their own risks. Bond issues can default. Interest rates rise from time to time, sending prices down for bonds and bond funds.

Here are additional risks for bonds and bond ETFs:

• Rising rates: When interest rates rise, bond prices fall.
• Rising inflation: inflation makes interest rates rise, causing a decrease in value of existing bonds.
• Default by issuer: If a bond issuer becomes financially unable to repay its debt, it may default on bond interest or principal payments.
• Low liquidity: some bonds trade in small markets, making their bonds vulnerable to price volatility.

On the other hand, certain key conditions are turning in favor of bonds and bond ETFs. Those include:

• Interest rates: since March of 2022, the Federal Reserve had raised interest rates each time it met. In June 2023, that 15-month streak ended. The Fed war on high inflation may not be over yet, but policymakers felt comfortable enough to take a break.
• Inflation: the annual U.S. inflation rate fell below 3% in June. That was its twelfth consecutive monthly decrease. It peaked above 9% in June 2022.

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