Skip to Content
Our Picks

The Best Bond Funds

These exchange-traded funds and mutual funds earn Morningstar’s top rating.

A photo illustration of author Susan Dziubinski.
Mentioned: , , , , , , , , ,

To say bond exchange-traded funds and mutual funds are struggling in 2022 is an understatement: Through the end of the third quarter, the Bloomberg U.S. Aggregate Bond Index had shed nearly 15%. This may end up being the worst year on record for bond-fund investors.

However, there’s still a case to be made for holding bond ETFs and mutual funds your portfolio. Bonds are still less risky than stocks, for example, and should do a better job of keeping up with inflation than cash over time.

Do You Need a Bond Fund?

Investors rely on bonds for many reasons: funding short-term goals, diversifying a stock-heavy portfolio over the long term, or generating income during retirement, to name a few. Before getting down to choosing a bond ETF or mutual fund, step back and consider why you need one: What role is it playing for you?

Once you know what need it’s filling, figure out whether a taxable-bond fund or municipal-bond fund is a better choice for you. If you’re investing via a tax-deferred account like an IRA or 401(k), a taxable-bond ETF or fund will be the better match. If you’re investing in a taxable account, though, municipal bonds might be the better choice on an aftertax basis.

A good place to start your search for top bond ETFs and mutual funds—both taxable and municipal alike—is with the Morningstar Analyst Rating. Mutual funds and ETFs that earn our highest rating of Gold are those that we think are most likely to outperform over a full market cycle.

What Is a Taxable-Bond ETF or Mutual Fund?

Taxable-bond ETFs and mutual funds invest in fixed-income securities issued by governments and corporations.

The “right” type of taxable-bond ETF or mutual fund for you comes down to personal preferences. Will you forgo the incremental yield and diversification benefits that high-quality long-term bond funds typically offer for some protection against rising interest rates? Do you want to stick with the highest-quality bonds you can find, or are you willing to delve into lower-quality bonds in exchange for higher yield? Will you dabble in world bonds for yield pickup—and if yes, do you want currencies in the mix?

To help determine which types of taxable-bond ETFs and mutual funds may make sense in your situation, read “A Checklist for Taxable-Bond-Fund Investors.”

Here are a few broad types of taxable-bond funds to consider:

Domestic Taxable-Bond ETFs and Mutual Funds:Funds landing in the long-term, intermediate-term, short-term, and ultrashort bond Morningstar Categories cluster here. The funds blend government bonds, asset-backed or mortgage-backed securities, investment-grade and high-yield debt, and a modest dose of international bonds. Although some funds are more income-oriented or more opportunistic than others, most provide decent exposure to a variety of bond types.

Flexible-Bond ETFs and Mutual Funds:Multisector and nontraditional bond funds land here. Like domestic taxable-bond funds, flexible-bond funds can invest across a mix of bond types. Unlike domestic taxable-bond funds, flexible-bond funds invest more aggressively in lower-quality bonds and/or international debt. And nontraditional bond funds, in particular, enjoy a high degree of interest-rate flexibility and may employ shorting. Simply put, these are the least constrained bond funds.

Government-Bond ETFs and Mutual Funds:The highest-quality taxable-bond funds reside in this group. To be included in one of Morningstar’s U.S. government-bond categories, a fund must keep at least 90% of its assets tucked in government securities. Funds that invest strictly in Treasuries, strictly in mortgage-backed securities, or in some combination of the two populate the group. There are three government-focused categories included here, broken down by duration: short government, intermediate government, and long government.

Corporate-Credit ETFs and Mutual Funds: These funds favor bonds issued by corporations. Categories in this group include corporate-bond funds, high-yield bond funds, and bank-loan funds. Corporate-bond funds focus on bonds rated investment-grade; these funds, therefore, exhibit some degree of interest-rate sensitivity. High-yield bond funds target bonds rated below-investment-grade; these funds invite more credit risk than interest-rate risk. Finally, bank-loan funds also invest in securities rated below-investment-grade, and their interest payments are periodically reset. Because of their floating rates, bank loans theoretically have less sensitivity to interest-rate movements.

World- and Emerging-Markets Bond ETFs and Mutual Funds:The funds in this group favor fixed-income securities issued by governments and corporations outside of the United States. That’s about the only thing they all have in common. World-bond funds must invest at minimum 40% of their assets in non-U.S. debt, but some exclude U.S. debt entirely, or focus on corporates rather than governments, or hedge currencies—or don’t. Emerging-markets debt funds, meanwhile, keep at least 65% of their assets in developing-markets debt; but here, too, there are significant variations in currency strategies.

Inflation-Protected Bond ETFs and Mutual Funds:As their names suggest, inflation-protected bond funds seek to protect investors from rising inflation. As such, these funds invest in securities whose principal values adjust along with the rate of inflation.

The Best Taxable-Bond ETFs and Mutual Funds

These funds all land in one of the taxable-bond Morningstar Categories and have at least one share class that earns our top Analyst Rating of Gold as of October 2022.

  1. Baird Aggregate Bond BAGIX
  2. Baird Short-Term Bond BSBIX
  3. BlackRock High Yield Bond BHYIX
  4. BlackRock Total Return MAHQX
  5. Dodge & Cox Income DODIX
  6. Fidelity Total Bond FTBFX
  7. Fidelity Total Bond ETF FBND
  8. Fidelity U.S. Bond Index FXNAX
  9. iShares Core U.S. Aggregate Bond ETF AGG
  10. Loomis Sayles Core Plus Bond NERYX
  11. PGIM High Yield PBHAX
  12. PGIM Short-Term Corporate Bond PSTQX
  13. Pimco GNMA and Government Securities PDMIX
  14. Pimco Income PIMIX
  15. Pimco Long Duration Total Return PLRIX
  16. Pimco Total Return PTRAX
  17. Vanguard Long-Term Bond ETF BLV
  18. Vanguard Long-Term Bond Index VBLLX
  19. Vanguard Total Bond Market ETF BND
  20. Vanguard Total Bond Market Index VBTIX
  21. Western Asset Core Bond WATFX
  22. Western Asset Core Plus Bond WACPX

The list is a hodgepodge of styles. Funds like Vanguard Total Bond Market Index and Dodge & Cox Income, for instance, largely favor intermediate-term, high-quality government and corporate bonds. BlackRock High Yield Bond and PGIM High Yield, meanwhile, focus exclusively on lower-quality corporate bonds. Baird Short-Term Bond limits itself to bonds in the one- to three-year maturity range. And Pimco Income can pretty much invest in all the above. Morningstar Investor members can learn more about each of these investments by reviewing their Analyst Reports.

What Is a Municipal-Bond ETF or Mutual Fund?

Municipal-bond ETFs and mutual funds invest in bonds issued by state and local governments to finance capital expenditures. Unlike taxable bonds, municipal bonds provide tax advantages that can be especially appealing to higher-income investors who are investing via taxable accounts. How? Municipal bonds are often exempt from federal taxes as well as state and local taxes.

On the surface, municipal bonds appear to yield less than taxable bonds of similar quality and maturity—but that’s before taxes are taken into consideration. How can you determine if municipal bonds are a good choice for you? Use a tax-equivalent yield calculator to see how a given municipal-bond ETF or mutual fund’s yield compares with the yield of a similar maturity and quality taxable-bond ETF or mutual fund, given your particular tax circumstances.

What Are Municipal Bonds?” provides five questions to help determine whether municipal bonds are right for you.

The Best Municipal-Bond ETFs and Mutual Funds

These ETFs and mutual funds all land in one of the municipal-bond Morningstar Categories and have at least one share class that earns a Gold rating as of October 2022.

  1. American Funds Tax-Exempt Bond TFEBX
  2. American Funds Tax-Exempt Fund of California EXCAX
  3. Fidelity Tax-Free Bond FTABX
  4. T. Rowe Price Tax-Free High Yield PTYIX
  5. Vanguard California Intermediate-Term Tax-Exempt VCADX
  6. Vanguard California Long-Term Tax-Exempt VCLAX
  7. Vanguard High-Yield Tax-Exempt VWALX
  8. Vanguard Intermediate-Term Tax-Exempt VWITX
  9. Vanguard Long-Term Tax-Exempt VWLUX
  10. Vanguard Limited-Term Tax-Exempt VMLUX
  11. Vanguard Short-term Tax-Exempt VWSUX

As with the list of top-rated taxable-bond ETFs and mutual funds, this list also includes a wide variety of funds focusing on different maturities and credit qualities. This list also features a few single-state-focused municipal-bond funds: American Funds Tax-Exempt Fund of California and intermediate- and long-term California options from Vanguard. If you reside in a filling state other than California, you may want to expand your search beyond our Gold-rated list of funds to find a municipal-bond fund focused on your state. You can do so with the Morningstar Investor Screener: Simply choose your investment type (either ETFs or mutual funds) and then select the Morningstar municipal-bond category for your state.

Uncover top mutual fund and ETF picks from a source that investors trust. Morningstar Investor’s mutual fund and ETF ratings, analysis, and insights are all backed by our transparent, meticulous methodology. Learn more and start a seven-day free trial today.

Susan Dziubinski does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.