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Best Bond Funds to Buy in 2021

A bond is a debt instrument that is traded on a stock exchange. It represents a loan made by an investor to a borrower and includes the details of the loan and its payments; think of it as an IOU. When you buy a bond, you are lending to the issuer, which can be a government, municipality, or corporation that promises to pay you a specified rate of interest during the life of the bond and to repay the principal (face value or par value of the bond) when it matures.

Rather than invest in individual bonds, you can buy a basket of bonds, known as a bond fund, in one single investment. In this guide, we explain what bond funds are and offer our top 10 best bond funds to buy.

Where Can I Trade Bond Funds?

You can buy bond funds directly from the investment firms that created the funds, with no commissions or brokerage fees. You can also buy from other investment firms that offer financial services, or online brokers. 

Most brokers and other online trading platforms allow you to trade bond funds with the standard share-dealing accounts. UK brokers also allow you to trade bond funds via any of the tax-efficient trading accounts such as a Stock & Shares ISA or Self-Invested Personal Pension (SIPP) if you’re a UK resident.

It can be quite difficult for new traders to decide which broker to use, given the many options available in the market. So, we have compiled a list of some of the best brokers based on fees, regulatory status, and other unique features provided by the platform. 

1
Min. Deposit
$50
Exclusive promotion
Our score
10
Trade/invest in stocks with just $50
Invest for dividends and get payout on stocks on Ex-Dividend day
Over 11 payment methods, including PayPal
Start Trading
Pros:
Trade/invest in stocks with just $50
Invest for dividends and get payout on stocks on Ex-Dividend day
Over 11 payment methods, including PayPal
Payment Methods
Wire Transfer, Bank Transfer
Full regulations list:
CySEC, FCA
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2
Min. Deposit
$1
Exclusive promotion
Our score
9.3
0 Commissions and no deposit minimums
Registered with and regulated by SEC and FINRA
Loss of cash protection
Start Trading
Pros:
0 Commissions and no deposit minimums
Registered with and regulated by SEC and FINRA
Loss of cash protection
Payment Methods
Full regulations list:

What are Bond Funds?

A bond fund is a form of a mutual fund or exchange-traded fund (ETF) that invests only in bonds. In other words, it is a portfolio of multiple individual bonds, which is put together and managed by a professional and can be traded as a single unit. The value of each unit share is known as the net asset value (NAV). 

Some bond funds invest in specific types of bonds, such as corporate bonds or government bonds, and may even concentrate on a certain maturity period, such as long-term (10 years or more), short-term (less than 3 years), and intermediate-term (3 to 10 years). So, you may see variants, like a short-term treasury fund or a corporate high-yield fund. However, there are bond funds that track the broad bond market, consisting of both the long-term and short-term bonds from all types of issuers, including corporations, federal governments, municipalities, and government agencies.

Whether a bond fund focuses on a specific segment of the market or invests broadly, one peculiar thing about bond funds is that they rarely hold any bond until maturity, as they are frequently buying and selling bonds in line with the market conditions in a bid to maintain the goal of their portfolio.

Bond funds offer an easier way to have a diversified bond portfolio with small capital, since investing in a bond fund means buying a basket of different bonds in one investment. Bond funds pay monthly interest, but the amount may vary from month to month. While bond ETFs have lower management fees, bond mutual funds tend to charge a higher management fee. There may be other fees too — some bond funds may charge a redemption fee for shares sold within a certain period, while others may charge a small annual account fee.

How to Trade and Invest in Bond Funds?

1

Choose the Bond Fund to Buy

First, choose the type of bond fund to buy: a bond mutual fund (which you can buy directly from the investment company that created it) or a bond ETF (which you only buy through a broker). Choose bond funds that meet your investment goals, fit the prevailing interest rate, and suit your risk tolerance. Also, consider key fundamentals: 30-day yield and total return over time.

2

Open a Trading Account

If you intend to buy bond ETFs or buy mutual funds through a broker, you can open an account with a broker of your choice. You will need to submit basic details such as your full name, address, and email to open an account. And you’ll have to provide some form of identification.

3

Place Your Trade

When you’ve created your account and funded it with the amount you want to invest, you go ahead and place your buy order for your chosen bond fund from the online list provided by the broker. Monitor the fund regularly and adjust your position if required.

Top 10 Bond Funds to Trade

Based on returns, total assets under management, and the kinds of bonds they invest in, these are the best bond funds to buy in 2021:

  1. Vanguard Total Bond Market ETF (BND)
  2. iShares Core U.S. Aggregate Bond ETF (AGG)
  3. iShares Core Total USD Bond Market ETF (IUSB)
  4. Fidelity U.S. Bond Index Fund (FXNAX)
  5. Vanguard Core Bond Fund Investor (VCORX)
  6. Nuveen ESG U.S. Aggregate Bond ETF (NUBD)
  7. BlackRock Strategic Income Opportunities Investor A (BASIX)
  8. SPDR Portfolio Mortgage-Backed Bond ETF (SPMB)
  9. Vanguard Short-Term Investment-Grade Fund (VFSUX)
  10. SPDR Bloomberg Barclays 1-3 Month T-Bill ETF (BIL)

Vanguard Total Bond Market ETF (BND)

BND is a broad-exposure, exchange-traded bond fund that targets US investment-grade bonds with medium or long-term maturities. Being passively managed, the fund’s cost is low at 0.035% and the yield is fair at 1.2% as of the time of writing.

As of February 2021, the fund’s assets under management were over $58 billion, invested in more than 9,650 bonds, with about 42% in Treasury and other agency debt, 29% in investment-grade corporates, 24% in mortgage-backed securities, and the rest in sovereign debt and asset-backed securities.

iShares Core U.S. Aggregate Bond ETF (AGG)

AGG is one of the best bond ETFs in the market, being an index fund that tracks the Bloomberg Barclays U.S. Aggregate Bond Index: the standard benchmark for most bond funds. The fund’s cost is 0.04%, and the yield is 1.3% as of February 2021.

At the time of writing, AGG’s assets are worth $71 billion in a portfolio of over 8,150 bonds: 38% in Treasuries, 28% in corporate debt, 25% in mortgage-backed securities, and the rest in agency, sovereign, municipal, and other bonds.

iShares Core Total USD Bond Market ETF (IUSB)

IUSB is a strong core bond fund that offers a mixture of primarily investment-grade debt and higher-yield bonds. The fund’s portfolio includes nearly 10,000 bonds, with about 33% in investment-grade corporate debt, 31% in Treasuries, 23% in mortgage-backed securities, and the rest is sprinkled among agency issues, international sovereign debt, and other types of bonds. The yield is 1.7%, while the cost is just 0.06% as of February 2021.

Fidelity U.S. Bond Index Fund (FXNAX)

FXNAX is an index bond fund that tracks the Bloomberg Barclays U.S. Aggregate Bond Index, with about 41% of the fund's holdings in U.S. Treasury-related securities and 26% are in corporate bonds. As of the time of writing in February 2021, the distribution yield of the fund is 1.72%, while the expense rate is small — just 0.025%.

Vanguard Core Bond Fund Investor (VCORX)

VCORX is an actively managed core bond mutual fund. With over $2.2 billion under management as of February 2021, the fund invests across the spectrum of investment-grade debt (nearly 1,300 bonds at the moment), with a wide range of maturities (an average of 7.3 years).

The portfolio’s holdings are as follows: 37% in government mortgage-backed securities, 35% in investment-grade corporate debts, and 16% in Treasuries. VCORX charges 0.25% in annual fees, and its three-year total return is 18.4% as of 2021.

Expert Tip on Investing in Bond Funds

Bond funds are a passive form of investment in the bond market. Unlike the individual bonds that you can hold till maturity to retain your full capital while collecting interest, a bond fund doesn’t have a specified maturity date; you only buy them to sell at a higher net asset value (NAV) while earning a monthly income. Thus, it is better to invest in bond funds (rather than individual bonds) when interest rates are expected to decline because bond prices will be rising, which offers you the opportunity to sell at a higher NAV.
- VantagePointTrading Press Team VantagePointTrading Press Team

Why Invest in Bond Funds?

There are many reasons to want to invest in a bond fund. It easily offers you a diversified bond portfolio that is managed by a professional. Also, bond funds have good liquidity, making them easy to buy and sell at your convenience. Moreover, there is a monthly income stream, which can be tax-free if it is a municipal bond fund.

Frequently Asked Questions

  1. No. Most brokers are open for trading during market hours on weekdays. Check with the broker you intend to trade with to find out the trading hours.

  2. Yes. Most countries consider profit from trading as a taxable activity, so you’ll have to pay some kind of capital gains tax or income tax on any money you make. Check your local taxation laws before trading.

  3. A bond is a debt obligation issued by governments or corporations, while a bond fund is a basket of multiple individual bonds traded as a single unit.

  4. Yes. Some brokers may provide additional services such as bot trading for traders. A trader could also make use of stop-loss and take-profit orders to automate buying/selling. Check with the broker to see if such automated services are available.

  5. A trader should always select a regulated platform for trading. The trader can also make use of additional security measures such as two-factor authentication (2FA) to secure the trading account.

  6. Yes, a bond fund is a passive form of investment in the bond market, which is relatively less risky than other forms of investment. It provides beginners with a diversified bond portfolio that is managed by a professional. Moreover, the monthly interest is a good way to earn a steady income.

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