The Best Bond ETFs
These fixed-income-focused exchange-traded funds all earn Gold ratings.
Do you need bonds in your portfolio?
The question is, of course, a personal one. Those with goals in the three- to 10-year range--say, buying a new home, retiring within the next decade, or sending your youngest who just started high school to college--likely do. Bonds are also favored by investors who may not be comfortable being 100% in equities, no matter their time horizons.
Exchange-traded funds focused on fixed-income securities can be excellent choices for getting exposure to bonds. For starters, most ETFs are transparent--they track indexes with very specific duration and credit-quality traits--and offer few surprises. Moreover, they're usually low-cost, which is even more important when investing in bonds than in equities: Every basis point paid in expenses is one less basis point in return, and returns are typically tougher to come by with bonds than with stocks.
A good place to start your search for top bond ETFs is with the Morningstar Analyst Rating. Funds that earn our highest rating--Gold--are those that we think are most likely to outperform over a full market cycle.
Just four ETFs spread across three investment categories earn our highest rating of Gold.
The fund on the list that's suitable for the largest swath of investors is likely Fidelity Total Bond ETF (FBND).
Why? Because when it comes to bond investing, intermediate-term funds are the starting point--and for many, the ending point, too.
"Be sure to start building your bond-fund portfolio with core, intermediate-term funds that give you a lot of diversification in a single holding," recommends Morningstar director of personal finance Christine Benz.
Earlier this year, we split the intermediate-term bond Morningstar Category in two: intermediate core bond and intermediate core-plus bond. Funds in both categories invest largely in investment-grade U.S. fixed-income issues, including government, corporate, and securitized debt; they usually maintain durations that range from 75% of 125% of the three-year average effective duration of the Morningstar Core Bond Index. The difference: Core-plus funds have more flexibility to own noncore bonds, such as corporate high-yield, bank-loan, and emerging-markets debt.
Fidelity Total Bond is of the "plus" ilk. It's also actively managed, unlike other bond ETFs that track an index.
"Besides investing in the typical investment-grade credit, mortgages, and U.S. Treasuries that constitute the fund's Bloomberg Barclays U.S. Aggregate Bond Index benchmark, lead portfolio manager Ford O'Neil and his team may allocate up to 20% in non-investment-grade bonds, including high-yield and emerging-markets debt, when they find market valuations compelling," explains analyst Emory Zink. "Relative to more conservatively positioned core-plus bond peers, this provides the fund with an edge in risk-on markets, but the flexibility may also invite more volatility."
The experienced team, nimble implementation of its flexible strategy, and reasonable fees earn the ETF our top rating.
Should your search for an intermediate-term bond ETF stop here? Not necessarily. Perhaps you're not looking for flexibility and would rather stick with intermediate-term bond ETFs focused on highly rated securities instead. Silver-rated choices from the intermediate core bond category include Schwab U.S. Aggregate Bond ETF (SCHZ), Vanguard Intermediate-Term Bond ETF (BIV), SPDR Portfolio Aggregate Bond ETF (SPAB), and iShares Core U.S. Aggregate Bond ETF (AGG). Passive "plus" strategies include Silver-rated iShares Core Total USD Bond Market ETF (IUSB). And another "plus" strategy to consider--this one's actively managed, too--is Silver-rated Pimco Active Bond ETF (BOND).
Two of the other Gold-rated funds on our list--Vanguard Short-Term Inflation-Protected Securities ETF (VTIP) and Schwab U.S. TIPS ETF (SCHP)--land in the inflation-protected bond category. Either would make a good choice for those looking to add a bit of inflation protection to their portfolios--especially to a bond-heavy portfolio. TIPS funds are especially good choices for those in retirement, says Benz.
"The part of your portfolio that you're withdrawing from for your living expenses--that's not getting inflation-adjusted because it's often in bonds," she says.
The final Gold-rated fund on the list--Pimco Enhanced Short Maturity Active ETF (MINT)--lands in the ultrashort bond category. ETFs in this group and the short-term bond categories are good choices for nearer-term goals.
The Pimco ETF is actively managed, with a focus on capital preservation. Low costs and a high-caliber management team underpin its Gold rating.
"The team has the expertise to employ a wider range of tactics than many of its ultrashort bond Morningstar Category competitors," explains director Miriam Sjoblom. "But while that can translate to a bit more risk at PIMCO Short-Term (PTSHX), manager Jerome Schneider follows a buttoned-up process here … [that] doesn't use derivatives, won't take currency risk, and sticks with investment-grade debt."
Other highly rated choices among shorter-term bond ETFs include Silver-rated Fidelity Limited Term Bond ETF (FLTB), Schwab Short-Term U.S. Treasury ETF (SCHO), Vanguard Short-Term Bond ETF (BSV), Vanguard Short-Term Treasury ETF (VGSH), and iShares Short-Term Corporate Bond ETF (IGSB).
Premium Members can access a complete list of Medalist ETFs here.
Susan Dziubinski does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.