BEST BOND ETF TO BUY NOW
Here is the complete guide:
- iShares Core Total USD Bond Market ETF (IUSB)
- iShares US Treasury Bond ETF (GOVT)
- iShares Broad USD Investment Grade Corporate Bond ETF (USIG)
- SPDR Bloomberg Barclays High Yield Bond ETF (JNK)
Are the Best Bond ETFs for Q3 2020 in their respective categories assuming an Intermediate Time Horizon with 5 to 10 year duration and generating the highest Yields
ULIMATE GUIDE TO BOND INDEX FUNDS — HOW TO INVEST
BEST BOND ETFS TO BUY NOW
- iShares Core Total USD Bond Market ETF (IUSB)
- iShares US Treasury Bond ETF (GOVT)
- iShares Broad USD Investment Grade Corporate Bond ETF (USIG)
- SPDR Bloomberg Barclays High Yield Bond ETF (JNK)
Are the Best Bond ETFs for Q3 2020 in their respective categories assuming an Intermediate Time Horizon with 5 to 10 year duration and generating the highest Yields
ULIMATE GUIDE TO BOND INDEX FUNDS - HOW TO INVEST
OUR INDEPENDENT APPROACH
We have performed some in depth research because finding the right Bond Index Fund may be difficult. Because there are hundreds on them. These have some of the lowest expense ratios and are fairly liquid. Importantly, they are considered to be some of Best and Largest Fixed Income ETFs by market participants.
Metrics below include Year to Date Performance, Fund Size, Expense Ratio, Risk (Duration and Spread), Yields and Last Dividends. We have included main Fixed Income Index Fund categories: Treasuries, Corporates – Investment Grade and High Yield.
For simplicity, we use Index Funds and ETFs words interchangeably. For the differences see FAQ below (the specific Funds below are ETFs)
UNDERSTAND YOUR NEEDS
Main Bond Fund Characteristics
In order to choose the right Bond Index Fund for your portfolio you need to assess your needs based on two factors:
- Your Risk Tolerance
- Your Time Horizon
Risk Tolerance (Credit Risk)
#1 Aggregate Bond Funds
Also called Core Funds. The first group is a broad category consisting of a mix of the below categories #2 Treasury, #3 High Quality Corporate and Mortgage Bonds, all usually rated Investment Grade. Importantly, these are the easiest to invest since it includes most of the high quality bond universe (therefore, we will start with them below – you may just pick one and stop there. Otherwise you may consider the other three categories)
#2 US Treasury Bond Funds
The second group consists of Treasury Bonds that are considered virtually risk-free (no Default Risk). However, yields are currently very low and after accounting for inflation even negative for short term / intermediate
#3 High Quality Corporate Bond Funds
The third group consists of bonds called Investment grade bonds – considered relatively safe because the resources of the issuers are sufficient to indicate a good capacity to repay obligations (usually issued by Blue-Chip Companies)
When you review the below tables keep in mind that conceptually the higher the “Spread” the higher the Credit Risk (although Spreads tend to also increase with time horizon, more about this here)
#4 Niche Funds
#4A High Yield Bond Funds
While Categories #1-3 cover the largest, fairly safe markets and provide with downside risk and may provide moderate upside potential during a downturn (#1 and #2 can be uncorrelated to Equities) Category #4A is by definition more risky.
The highest yielding bonds also known as speculative. Importantly, both categories #3 and #4 face Default Risk. However, #4 Speculative-grade bonds are issued by companies perceived to have a lower level of credit quality compared to more highly rated #3 investment-grade, companies (Read More on Credit Ratings)
#4B – F Inflation Protection, Municipal and European Bonds
Other Niches include Inflation Protection Treasury Bond ETFs (also known as TIPS), Municipals (also known as Munis) or European Bonds. Each have their specific characteristics described in their respective sections. Inflation Protection ETFs are as safe as Treasuries and will generate Real Rates of return (which are currently negative!) but protect you should inflation pick up. Municipal Bonds are financing local governments and may have higher Yield than Treasuries (but also more risk) and potentially preferential Tax treatments.
Time Horizon (Interest Rate Risk)
- Firstly, it is considered good practice to match your time horizon (Short Term, Intermediate or Long term) with the appropriate Fund Maturity Profile. All bonds carry Interest Rate Risk. Note that the longer the duration the more you can gain or lose from moving interest rates
- Secondly, you need to understand why the value of Bonds decreases with rising interest rates. Think of it as an opportunity cost for an investor to keep holding on on Bonds that are generating less than newly issued at higher interest rates. That said, a bond will converge towards par (100) on maturity, thus conceptually you don’t take much interest rate risk when holding bonds to maturity.
Look at the “Duration” value in the below tables
INFLATION RATES
Before any Bond ETF analysis below don’t forget to have a quick look at expected Inflation.
Always compare expected ETF Yield to (broadly) same horizon of expected Inflation. By substracting inflation from the Nominal Yield in the below ETF tables you will understand what is the real return you can expect accounting for changes in consumer prices
#1 AGGREGATE BOND INDEX FUNDS
Best Core Bond ETF - iShares Core Total USD Bond Market ETF (IUSB)
- Firstly, the fund is fairly safe Fund for Coronavirus Market Environment with close to 65% of Bonds in the highest rating category (AAA)
- Secondly, the ETF is generating an expected 2.5% Yield in this low Yield environment (this is c. 2% higher than Treasury Bond ETF Funds alone)
- Thirdly, outside of Government Bonds and Mortgage backed Securities from government-backed entities like Fannie Mae and Freddie Mac the incremental Yield comes from a handful on Financial Institutions like Morgan Stanley or Industrials like Oracle, Verizon or Dell
- In conclusion, this fund should provide a good diversification for your Equity portfolio while still generating yield
Best Core Bond ETFs in 2020 - Other Alternatives
Below are some of the Best Fixed Income ETFs in 2020 as regarded by Market Participants in Category “Aggregate Bond ETFs” sorted by by Size:
Main Aggregate Bond ETF for your Portfolio - Read More
US Aggregate Bond ETF - Short Term Maturity
US Aggregate Bond ETFs - Intermediate Maturity
US Aggregate Bond Index ETFs - Long Term Maturity
iShares Short Maturity Bond ETF (NEAR)Vanguard Short-Term Bond ETF (BSV)iShares Core 1-5 Year USD Bond ETF (ISTB)iShares Ultra Short-Term Bond ETF (ICSH)Invesco Ultra Short Duration ETF (GSY)
#2 TREASURY BOND INDEX FUNDS
Best Treasury Bond ETF - iShares US Treasury Bond ETF (GOVT)
- Firstly, this fund provides with the best Yield in the Intermediate category
- Secondly, it is the safest Investment that benefits from flight to quality should the market deteriorate (yes, yields can go even lower from here which would boost this fund)
- However, after accounting for Inflation like most of the below Funds, GOVT ETF yields a negative Real Return e.g. Annual Yield is 0.9% while 7 Year Inflation Rate (above tables) is close to 1%
- Also, there is also a risk on underperformance should Inflation come back
- In conclusion, this is why we currently prefer the Aggregate Funds (Category #1) or Investment Grade Bonds (Category #3) over Treasuries
- Read more about risks and returns you can expect from US Treasury Bonds in 2020
Best US Government Bond ETFs in 2020 - Other Alternatives
Below are some of the Best Fixed Income Index Funds in 2020 as regarded by Market Participants in Category “Treasury Bond ETFs” sorted by Size:
Main Treasury Bond ETF for your Portfolio - Read more
US Treasury Bond ETFs - Short Term Maturity
US Treasury Bond ETFs - Intermediate Maturity
US Treasury Bond ETFs - Long Term Maturity
iShares Short Treasury Bond ETF (SHV)iShares 1-3 Year Treasury Bond (SHY)SPDR Bloomberg Barclays 1-3 Month (BIL)Vanguard Short-Term Treasury ETF (VGSH)Schwab Short-Term U.S. Treasury (SCHO)SPDR Portfolio Short Term Treasury (SPTS)
# 3 HIGH QUALITY CORPORATE BOND INDEX FUNDS
Best Investment Grade ETF - iShares Broad USD Investment Grade Corporate Bond ETF (USIG)
- Firstly, it is a relatively high yielding (3.3%) Investment Grade Fund
- Secondly, the holdings are well diversified (over 6,500 Bonds) with a bias toward banking stocks, with roughly 20% of the portfolio in this sector similar to most investment grade ETFs since financials are heavy issuers
- However, similarly to other Funds a portion of the Portfolio (c. 40%) is rated just one notch above High Yield and is a risk in a current Coronavirus Macroenvironment
- Importantly, the Investment Grade sector benefits from the support of the FED that has started purchasing Bonds in May 2020
Best Investment Grade ETFs in 2020 - Other Alternatives
Below are some of the Best Fixed Income Index Funds in 2020 as regarded by Market Participants in Category “Investment Grade ETFs” sorted by Size. If you want to understand how the Spread (Credit Risk) for Investment Grade Bond Universe has evolved over time check FED data
Main Investment Grade Bond ETF for your Portfolio - Read more
Investment Grade Bond ETFs - Short Term Maturity
Investment Grade Bond ETFs - Intermediate Maturity
Investment Grade Bond ETFs - Long Term Maturity
Vanguard Short-Term Corporate Bond ETF (VCSH)iShares Short-Term Corporate Bond ETF (IGSB)iShares Floating Rate Bond ETF (FLOT)SPDR Portfolio Short Term Corporate Bond ETF (SPSB)iShares Ultra Short-Term Bond ETF (ICSH)SPDR Bloomberg Barclays Investment Grande Floating Rate ETF (FLRN)Invesco Ultra Short Duration ETF (GSY)
#4A HIGH YIELD CORPORATE BOND INDEX FUNDS
Best High Yield ETF - SPDR Bloomberg Barclays High Yield Bond ETF (JNK)
- Firstly, it is High Risk / Reward investment with substantial Credit Risk e.g. over 10% is in Energy Sector alone with other risky sectors like Aircraft part manufacturers
- Secondly, the fund is well diversified with over 900 Bonds
- Thirdly, Interest Risk is relatively lower to other categories because the Bonds are floating (not fixed)
- However, close to 15% of the Fund is Rated CCC or lower with high Default Risk (see chart below that indicates risk before taking into account Coronavirus Market)
Best High Yield Bond ETF in 2020 - Other Alternatives
- Below is a dashboard of the Best Fixed Income Index Funds in 2020 – High Yield Bond ETFs by Size.
- Importantly, this is the riskiest part (high risk / high returns) of the mainstream ETF Bond Universe (you can observe how the Spreads are much wider than the Investment Grade category).
- Remember, it is not unusual to see some Bonds defaulting within these Funds. As such they tend to underperform during a downturn (similar to Equities, hence lower diversification benefit)
On the Graph below High Yield is represented by (BB & B & CCC/C)
The current (above) environment High Yield defaults are expected to triple according to S&P. While their annual rate was around 3% it is expected to jump to c. 10% in the next 12 months
Main High Yield Bond ETF for your Portfolio - Read more
#4 B INFLATION PROTECTION - TIPS ETFS
Main TIPS ETF for your Portfolio - Read more
OUR INDEPENDENT APPROACH
We have performed some in depth research because finding the right Bond Index Fund may be difficult. Because there are hundreds on them. These have some of the lowest expense ratios and are fairly liquid. Importantly, they are considered to be some of Best and Largest Fixed Income ETFs by market participants.
Metrics below include Year to Date Performance, Fund Size, Expense Ratio, Risk (Duration and Spread), Yields and Last Dividends. We have included main Fixed Income Index Fund categories: Treasuries, Corporates — Investment Grade and High Yield.
For simplicity, we use Index Funds and ETFs words interchangeably. For the differences see FAQ below (the specific Funds below are ETFs)
UNDERSTAND YOUR NEEDS
Main Bond Fund Characteristics
In order to choose the right Bond Index Fund for your portfolio you need to assess your needs based on two factors:
- Your Risk Tolerance
- Your Time Horizon
Risk Tolerance (Credit Risk)
#1 Aggregate Bond Funds
Also called Core Funds. The first group is a broad category consisting of a mix of the below categories #2 Treasury, #3 High Quality Corporate and Mortgage Bonds, all usually rated Investment Grade. Importantly, these are the easiest to invest since it includes most of the high quality bond universe (therefore, we will start with them below — you may just pick one and stop there. Otherwise you may consider the other three categories)
#2 US Treasury Bond Funds
The second group consists of Treasury Bonds that are considered virtually risk-free (no Default Risk). However, yields are currently very low and after accounting for inflation even negative for short term / intermediate
#3 High Quality Corporate Bond Funds
The third group consists of bonds called Investment grade bonds — considered relatively safe because the resources of the issuers are sufficient to indicate a good capacity to repay obligations (usually issued by Blue-Chip Companies)
When you review the below tables keep in mind that conceptually the higher the “Spread” the higher the Credit Risk (although Spreads tend to also increase with time horizon, more about this here)
#4 Niche Funds
#4A High Yield Bond Funds
While Categories #1–3 cover the largest, fairly safe markets and provide with downside risk and may provide moderate upside potential during a downturn (#1 and #2 can be uncorrelated to Equities) Category #4A is by definition more risky.
The highest yielding bonds also known as speculative. Importantly, both categories #3 and #4 face Default Risk. However, #4 Speculative-grade bonds are issued by companies perceived to have a lower level of credit quality compared to more highly rated #3 investment-grade, companies (Read More on Credit Ratings)
#4B — F Inflation Protection, Municipal and European Bonds
Other Niches include Inflation Protection Treasury Bond ETFs (also known as TIPS), Municipals (also known as Munis) or European Bonds. Each have their specific characteristics described in their respective sections. Inflation Protection ETFs are as safe as Treasuries and will generate Real Rates of return (which are currently negative!) but protect you should inflation pick up. Municipal Bonds are financing local governments and may have higher Yield than Treasuries (but also more risk) and potentially preferential Tax treatments.
Time Horizon (Interest Rate Risk)
- Firstly, it is considered good practice to match your time horizon (Short Term, Intermediate or Long term) with the appropriate Fund Maturity Profile. All bonds carry Interest Rate Risk. Note that the longer the duration the more you can gain or lose from moving interest rates
- Secondly, you need to understand why the value of Bonds decreases with rising interest rates. Think of it as an opportunity cost for an investor to keep holding on on Bonds that are generating less than newly issued at higher interest rates. That said, a bond will converge towards par (100) on maturity, thus conceptually you don’t take much interest rate risk when holding bonds to maturity.
Look at the “Duration” value in the below tables
INFLATION RATES
Before any Bond ETF analysis below don’t forget to have a quick look at expected Inflation.
Always compare expected ETF Yield to (broadly) same horizon of expected Inflation. By substracting inflation from the Nominal Yield in the below ETF tables you will understand what is the real return you can expect accounting for changes in consumer prices
#1 AGGREGATE BOND INDEX FUNDS
Best Core Bond ETF — iShares Core Total USD Bond Market ETF (IUSB)
- Firstly, the fund is fairly safe Fund for Coronavirus Market Environment with close to 65% of Bonds in the highest rating category (AAA)
- Secondly, the ETF is generating an expected 2.5% Yield in this low Yield environment (this is c. 2% higher than Treasury Bond ETF Funds alone)
- Thirdly, outside of Government Bonds and Mortgage backed Securities from government-backed entities like Fannie Mae and Freddie Mac the incremental Yield comes from a handful on Financial Institutions like Morgan Stanley or Industrials like Oracle, Verizon or Dell
- In conclusion, this fund should provide a good diversification for your Equity portfolio while still generating yield
Best Core Bond ETFs in 2020 — Other Alternatives
Below are some of the Best Fixed Income ETFs in 2020 as regarded by Market Participants in Category “Aggregate Bond ETFs” sorted by by Size:
Main Aggregate Bond ETF for your Portfolio — Read More
US Aggregate Bond ETF — Short Term Maturity
US Aggregate Bond ETFs — Intermediate Maturity
US Aggregate Bond Index ETFs — Long Term Maturity
iShares Short Maturity Bond ETF (NEAR)Vanguard Short-Term Bond ETF (BSV)iShares Core 1–5 Year USD Bond ETF (ISTB)iShares Ultra Short-Term Bond ETF (ICSH)Invesco Ultra Short Duration ETF (GSY)
#2 TREASURY BOND INDEX FUNDS
Best Treasury Bond ETF — iShares US Treasury Bond ETF (GOVT)
- Firstly, this fund provides with the best Yield in the Intermediate category
- Secondly, it is the safest Investment that benefits from flight to quality should the market deteriorate (yes, yields can go even lower from here which would boost this fund)
- However, after accounting for Inflation like most of the below Funds, GOVT ETF yields a negative Real Return e.g. Annual Yield is 0.9% while 7 Year Inflation Rate (above tables) is close to 1%
- Also, there is also a risk on underperformance should Inflation come back
- In conclusion, this is why we currently prefer the Aggregate Funds (Category #1) or Investment Grade Bonds (Category #3) over Treasuries
- Read more about risks and returns you can expect from US Treasury Bonds in 2020
Best US Government Bond ETFs in 2020 — Other Alternatives
Below are some of the Best Fixed Income Index Funds in 2020 as regarded by Market Participants in Category “Treasury Bond ETFs” sorted by Size:
Main Treasury Bond ETF for your Portfolio — Read more
US Treasury Bond ETFs — Short Term Maturity
US Treasury Bond ETFs — Intermediate Maturity
US Treasury Bond ETFs — Long Term Maturity
iShares Short Treasury Bond ETF (SHV)iShares 1–3 Year Treasury Bond (SHY)SPDR Bloomberg Barclays 1–3 Month (BIL)Vanguard Short-Term Treasury ETF (VGSH)Schwab Short-Term U.S. Treasury (SCHO)SPDR Portfolio Short Term Treasury (SPTS)
# 3 HIGH QUALITY CORPORATE BOND INDEX FUNDS
Best Investment Grade ETF — iShares Broad USD Investment Grade Corporate Bond ETF (USIG)
- Firstly, it is a relatively high yielding (3.3%) Investment Grade Fund
- Secondly, the holdings are well diversified (over 6,500 Bonds) with a bias toward banking stocks, with roughly 20% of the portfolio in this sector similar to most investment grade ETFs since financials are heavy issuers
- However, similarly to other Funds a portion of the Portfolio (c. 40%) is rated just one notch above High Yield and is a risk in a current Coronavirus Macroenvironment
- Importantly, the Investment Grade sector benefits from the support of the FED that has started purchasing Bonds in May 2020
Best Investment Grade ETFs in 2020 — Other Alternatives
Below are some of the Best Fixed Income Index Funds in 2020 as regarded by Market Participants in Category “Investment Grade ETFs” sorted by Size. If you want to understand how the Spread (Credit Risk) for Investment Grade Bond Universe has evolved over time check FED data
Main Investment Grade Bond ETF for your Portfolio — Read more
Investment Grade Bond ETFs — Short Term Maturity
Investment Grade Bond ETFs — Intermediate Maturity
Investment Grade Bond ETFs — Long Term Maturity
Vanguard Short-Term Corporate Bond ETF (VCSH)iShares Short-Term Corporate Bond ETF (IGSB)iShares Floating Rate Bond ETF (FLOT)SPDR Portfolio Short Term Corporate Bond ETF (SPSB)iShares Ultra Short-Term Bond ETF (ICSH)SPDR Bloomberg Barclays Investment Grande Floating Rate ETF (FLRN)Invesco Ultra Short Duration ETF (GSY)
#4A HIGH YIELD CORPORATE BOND INDEX FUNDS
Best High Yield ETF — SPDR Bloomberg Barclays High Yield Bond ETF (JNK)
- Firstly, it is High Risk / Reward investment with substantial Credit Risk e.g. over 10% is in Energy Sector alone with other risky sectors like Aircraft part manufacturers
- Secondly, the fund is well diversified with over 900 Bonds
- Thirdly, Interest Risk is relatively lower to other categories because the Bonds are floating (not fixed)
- However, close to 15% of the Fund is Rated CCC or lower with high Default Risk (see chart below that indicates risk before taking into account Coronavirus Market)
Best High Yield Bond ETF in 2020 — Other Alternatives
- Below is a dashboard of the Best Fixed Income Index Funds in 2020 — High Yield Bond ETFs by Size.
- Importantly, this is the riskiest part (high risk / high returns) of the mainstream ETF Bond Universe (you can observe how the Spreads are much wider than the Investment Grade category).
- Remember, it is not unusual to see some Bonds defaulting within these Funds. As such they tend to underperform during a downturn (similar to Equities, hence lower diversification benefit)
On the Graph below High Yield is represented by (BB & B & CCC/C)
The current (above) environment High Yield defaults are expected to triple according to S&P. While their annual rate was around 3% it is expected to jump to c. 10% in the next 12 months
Main High Yield Bond ETF for your Portfolio — Read more
#4 B INFLATION PROTECTION — TIPS ETFS
