The Best Bond ETFs
These fixed-income-focused exchange-traded funds all earn Gold ratings.
A version of this article was originally published on Nov. 13, 2019.
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, many 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.
The funds span a variety of fixed-income categories. However, 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.
Morningstar divides intermediate-term bond funds into two separate categories: intermediate core bond and intermediate core-plus bond. Funds in both Morningstar 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% to 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. As a result, they may boast higher yields than their core bond counterparts, but core-plus funds generally don't offer the same diversification benefit to a stock-heavy portfolio.
Dig deeper: For Bond Funds, Is Core-Plus Really a Minus?
Should your search for a bond ETF stop with intermediate-term funds? Not necessarily. Perhaps your goals are nearer-term in nature. In that case, funds from the short and ultrashort categories might be a better fit for you.
Further, the funds landing in the inflation-protected bond category might be suitable for those looking to add a bit of inflation protection to their portfolios--especially to a bond-heavy portfolio. Treasury Inflation-Protected Securities 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.
Premium Members can access a complete list of Morningstar Medalist ETFs here.
Susan Dziubinski does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.
Transparency is how we protect the integrity of our work and keep empowering investors to achieve their goals and dreams. And we have unwavering standards for how we keep that integrity intact, from our research and data to our policies on content and your personal data.
We’d like to share more about how we work and what drives our day-to-day business.
We sell different types of products and services to both investment professionals and individual investors. These products and services are usually sold through license agreements or subscriptions. Our investment management business generates asset-based fees, which are calculated as a percentage of assets under management. We also sell both admissions and sponsorship packages for our investment conferences and advertising on our websites and newsletters.
How we use your information depends on the product and service that you use and your relationship with us. We may use it to:
To learn more about how we handle and protect your data, visit our privacy center.
Maintaining independence and editorial freedom is essential to our mission of empowering investor success. We provide a platform for our authors to report on investments fairly, accurately, and from the investor’s point of view. We also respect individual opinions––they represent the unvarnished thinking of our people and exacting analysis of our research processes. Our authors can publish views that we may or may not agree with, but they show their work, distinguish facts from opinions, and make sure their analysis is clear and in no way misleading or deceptive.
To further protect the integrity of our editorial content, we keep a strict separation between our sales teams and authors to remove any pressure or influence on our analyses and research.
Read our editorial policy to learn more about our process.