The go-to investment instruments in times of great uncertainty are bonds: they don't make exciting price rallies and aren't as volatile as stocks, but they provide safe and steady income.
To reduce the investment risk further, instead of investing in individual bonds, investors go for bond ETFs, exchange-traded funds. The coronavirus pandemic is far from over, meaning that the current economic uncertainty will persist for the foreseeable future. For this reason alone, you should be looking at investing in bond ETFs. Our guide highlights the best bond ETFs in 2021 with the reasons why they are the best.
What is a Bond ETF?
You cannot start running without first knowing how to walk. So, first of all, what is a bond? A bond is a loan. Why not call it a loan then? The difference between a normal loan and a bond is that a bond is a tradable security. Bonds are broadly divided into two categories:
- Government Bonds are bonds issued by the government through the Federal Reserve, municipalities, or government agencies.
- Corporate Bonds are bonds issued by individual organisations. The issuing organisation's credit rating determines how attractive they are: an organisation issues high yield bonds that have a risk of default while an established organisation issues investment-grade corporate bonds with excellent credit rating.
Now to the running part - what is a bond ETF? Bond ETFs are exchange-traded funds containing different fixed securities, long-term and short-term debt securities, and convertible securities.
Even though bond ETFs are the safest investment instruments for a steady income, investing in bond ETFs blindly without understanding how bonds work will lead to money loss. The primary factor affecting the bond ETFs prices and yields are interest rates: they are inversely correlated. When the interest rate rises, the value of bond ETFs reduces, and vice versa.
In the wake of the coronavirus pandemic, the global economies put a cap rate on interest rates, ensuring it is as low as economically viable to ensure companies' survival. With the developing and distribution of the COVID-19 vaccine, interest rates are expected to be maintained at low levels, effectively reducing borrowing costs to spur economic recovery, which would result in a continued increase in the value of bond ETFs for the foreseeable future.
Invest in Bond ETFs in 3 Steps
Open a Trading Account
Choose a broker and open a trading account with them. Activate your new account through the link sent to your email as filled and deposit money into the new trading account.
Choose small-cap ETFs
Choose whether to invest in bond ETFs or trade them via CFDs. You can also do both.
Screen the available bond ETFs to see which ones match your investing and trading strategies and open a trade.
Where can I trade Bond ETFs?
The easiest way to become part of the bond ETF market is through a broker, either a traditional broker-dealer or an online broker. Choosing a traditional broker-dealer comes with a lot of hustle, and eventually, your portfolio won't be available to you 24/7. These challenges are the reason why if you have an internet connection, deciding for an online broker is the only viable choice. This way, you’ll have all the bond ETF varieties under one platform and access to your portfolio 24/7.
Below is our list of the top brokers for bond ETFs:
Best Bond ETFs to buy now
These are the best bond ETFs to buy in 2021. They will help you reduce the portfolio risk profile while providing steady returns.
The Top 10 bond ETFs for 2021 are:
- Direxion Daily 20+ Year Treasury Bull ETF [TMF]
- iShares Core US Aggregate Bond ETF [AGG]
- Flexshare Credit-Scored US Long Corporate Bond Index Fund [LKOR]
- Vanguard Total Bond Market ETF [BND]
- The SPDR Portfolio Long Term Corporate Bond ETF [SPLB]
- iShares iBoxx $ Investment Grade Corporate Bond ETF [LQD]
- Vanguard Short-Term Corporate Bond ETF
- The VanEck Vectors Investment Grade Floating Rate ETF [FLTR]
- Vanguard Total International Bond ETF [BNDX]
- iShares 7-10 Year Treasury Bond ETF [IEF]
Direxion Daily 20+ Year Treasury Bull ETF [TMF]
The ETF tracks the performance of the ICE U.S. Treasury 20+ Year Bond Index. It is a non-diversified fund made up of US treasury bonds with a maturity period of more than 20 years. It boasts $226 million in assets under management and an expense ratio of 1.05%. It is an ETF for a patient long-term investor.
iShares Core US Aggregate Bond ETF [AGG]
The AGG fund gives investors access to the broad United States bond market and has holdings across the entire US economic landscape: federal bonds, municipal bonds, and corporate bonds of large, medium, and small companies. It tracks the performance of the US investment-grade bond market and is ranked 5th in intermediate core bonds. It boasts $86 billion in assets under management with an expense ratio of 0.04%. It is very popular because of its high liquidity.
Flexshare Credit-Scored US Long Corporate Bond Index Fund [LKOR]
The LKOR is a non-diversified fund containing Long Corporate bond index categorised as investment grade by the Northern Trust. It measures dollar-denominated corporate bonds of higher credit quality companies with potentially high yields but low default risk. It has $54 million in assets under management with a yearly yield of 6.5%.
Vanguard Total Bond Market ETF [BND]
The BND combines both corporate and government bonds and includes approximately 18,000 bonds. However, it favours government bonds to reduce its risk profile. The BND is ranked 8th in the intermediate core bonds. It has close to $306 billion in assets under management yielding average annual returns of 4%.
The SPDR Portfolio Long Term Corporate Bond ETF [SPLB]
The SPLB tracks the Bloomberg Barclays U.S. Long Term Corporate Bond Index. All its underlying bonds performance is screened using this index, which measures the performance of corporate bonds with a maturity period of 10 years and above. Considering this, it’s no wonder it is ranked 3rd on the list of the best long-term bonds. It boasts $892 million in assets under management, a low expense ratio of 0.07%, and a yearly yield of 4.11%.
iShares iBoxx $ Investment Grade Corporate Bond ETF [LQD]
The LQD favours investment-grade corporate bonds with top contributors from healthcare, tech, and manufacturing industries. It has $47.7 billion in assets under management, with a yearly yield of 5.33% at an expense ratio of 0.14%. It is ranked 5th on the list of the best long-term funds for investment.
Vanguard Short-Term Corporate Bond ETF [VCSH]
The VCSH is for a trigger-happy and risk-averse investor who lacks patience for long-term investment and prefers short-term repayment which minimises risk. The average bond maturity period is 3 years. It has $44.5 billion in assets under management, with a yearly yield of 4.2% at an expense ratio of 0.05%.
The VanEck Vectors Investment Grade Floating Rate ETF [FLTR]
The FLTR is made up entirely of publicly listed companies and commercial entities issuing dollar-denominated floating rates. Therefore, it is a non-diversified fund that tracks the US floating rate index. It boasts of close to $470 million in assets under management with yearly yields of 1.3%. Despite being an ultra-short bond, it is popular because of its low 0.14% expense ratio. This ETF is ranked 3rd in the list of the best ultra-short bonds.
Vanguard Total International Bond ETF [BNDX]
The BNDX is a collection of over 6,000 bonds worldwide. The geographical diversification of this fund ensures a more heterogeneousness portfolio with risk spread across multiple global economies. The top contributors to this ETF are the most stable world economies, such as Germany, France, and Japan, which makes this ETF appealing to the investors. It boasts $169.2 billion in assets under management yielding 1.3% annual returns at 0.08% expense ratio.
iShares 7-10 Year Treasury Bond ETF [IEF]
The most attractive bonds are those issued by stable world economies. As such, it doesn't get better than IEF. The IEF is a fund made up primarily (95%) of US treasury bonds with maturity periods of 7-10 years. IEF assets under management are to the tune of $14.4 billion with annual returns of 4.4% at an expense ratio of 0.15%.
Expert tip on investing in Bond ETFs
Bond ETFs are low-risk investments, but interest rates play a critical role in their evaluation and price movement. It is therefore prudent to always estimate the fundamentals of interest rates.
Why trade Bond ETFs?
Through bond ETFs, investors can inexpensively access benchmarked bond indices and effectively reduce their investment portfolios' risk profile. However, there is still a risk of loss, especially with fluctuating interest rates.
Frequently Asked Questions
All of the Bond ETFs discussed here have the best potential for steady returns at minimal risk in 2021.
Absolutely. Before the global economy rebounds from the coronavirus's effects, bond ETFs will be the safest bet for consistent returns.
Anyone can invest in bond ETFs.
Bond ETFs are a collection of tradable fixed securities while shares are the stocks of a single company.
Bond ETFs are ideal for beginner investors because they offer passive exposure to the investment market with steady returns in an inexpensive way.
The size of global assets under management via bond ETFs currently is approximately $1.4 trillion.