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 lingers on around the world, meaning that economic uncertainty could persist for the foreseeable future. This is why we have identified the best bond ETFs to buy in 2021.
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. An online broker is best because you’ll have all the bond ETF varieties under one platform and access to your portfolio 24/7. We have found the best brokers for bond ETFs.
What is a Bond ETF?
Let’s start with what is a bond? A bond is a loan but it differs from a traditional load by being a tradable security. Bonds are broadly divided into two categories:
- Government Bonds are bonds issued by the government through the Federal Reserve (in the USA), municipalities, or government agencies.
- Corporate Bonds are bonds issued by individual organisations. The issuing organisation's credit rating determines how attractive the bonds are, ranging from high yield bonds that have a risk of default to investment-grade corporate bonds issued by established organisations with excellent credit ratings.
Now let’s look at what a bond ETF is. Bond ETFs are exchange-traded funds containing various 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 bond ETF prices and yields are interest rates: they are inversely correlated. When interest rate rises, bond ETFs fall, and vice versa.
In the wake of the coronavirus pandemic, global economies put a cap rate on interest rates, to help ensure the survival of economically viable companies. 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.
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.
- 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]
1. Direxion Daily 20+ Year Treasury Bull ETF [TMF]
This 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 (at the time of writing) and an expense ratio of 1.05%. It is an ETF for a patient long-term investor.
2. 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. At the time of writing, it boasts $86 billion in assets under management (AUM) and has an expense ratio of 0.04%. It is very popular because of its high liquidity.
3. Flexshare Credit-Scored US Long Corporate Bond Index Fund [LKOR]
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%.
4. Vanguard Total Bond Market ETF [BND]
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%.
5. The SPDR Portfolio Long Term Corporate Bond ETF [SPLB]
The SPLB ETF 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%. All correct at the time of writing.
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. ”- Alice Wanjiku
Why Trade Bond ETFs?
Through bond ETFs, investors can inexpensively access benchmarked bond indices and effectively reduce their investment portfolio’s 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. Until the global economy fully rebounds from the coronavirus pandemic, bond ETFs will be the safest bet for consistent returns.
Anyone with an online brokerage account can invest in bond ETFs.
Bond ETFs collections 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 is approximately $1.4 trillion at the time of writing.