The bond market presents a unique investment opportunity because of its fixed-income nature, and for some investors, a bond fund — rather than individual bonds — is a more efficient way of investing in the market. While individual bonds may be preferable in certain market situations, bond funds may be the better investment in other market situations. So, it will make sense to know what bond funds are and how to invest in them, which is why in this post, we will discuss the best bond funds to buy, but first, let’s find out what a bond fund is.
What is a bond fund?
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 unit.
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 varieties, 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.
Whichever way a bond fund invests — focusing on a specific segment of the market or investing 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.
Being a collection of many different bonds, bond funds offer an easier way to have a diversified bond portfolio with small capital. Bond funds pay monthly interest, but the amount may vary from month to month. While bond ETFs have less management fee, bond mutual funds tend to charge a higher management fee. There may be other fees: some bond funds may charge a redemption fee for shares sold within a certain period, while others may charge a small annual account fee.
Invest in bond funds in 3 steps
Choose the bond funds to buy
The first thing is to choose the type of bond funds to buy — a bond mutual fund, which you can buy directly from the investment company that manages the fund, or a bond ETF, which you buy through a broker. More specifically, you have to 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.
Open an account with the right firm
If you choose to trade bond mutual funds, it is cheaper to buy directly from the investment firms that offer and manage the funds as there are no commissions or brokerage fees. In this case, you should open an account with the firm. However, if you intend to buy bond ETFs or buy mutual funds through a broker, you can open an account with the broker of choice.
Fund your account and buy the chosen bond funds
After opening an account with your chosen firm, the next thing is to fund the account with the amount you want to invest. Now, you can buy the bond funds. This is very easy because you can do it online via the firm’s trading platform, which you will also use to monitor your investment.
Where can I trade bond funds?
You can buy bond funds directly from the investment firms that created the funds, other investment firms that offer financial services, or online brokers. The one you choose from the three options depends on the bond funds you want to trade and commission charges. We compared the three options in the table below:
Best bond funds to buy now
These are the best bond funds to buy in 2021; this is because they offer good yield at reasonable expense rates. The top 10 bond funds include:
- Vanguard Total Bond Market ETF (BND)
- iShares Core U.S. Aggregate Bond ETF (AGG)
- iShares Core Total USD Bond Market ETF (IUSB)
- Fidelity U.S. Bond Index Fund (FXNAX)
- Vanguard Core Bond Fund Investor (VCORX)
- Nuveen ESG U.S. Aggregate Bond ETF (NUBD)
- BlackRock Strategic Income Opportunities Investor A (BASIX)
- SPDR Portfolio Mortgage-Backed Bond ETF (SPMB)
- Vanguard Short-Term Investment-Grade Fund (VFSUX)
- 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 U.S. investment-grade bonds with medium- or long-term maturities. Being passively managed, the fund’s cost is low — 0.035% — and the yield is fair at 1.2%.
The fund’s assets under management are over $58 billion, which are invested in more than 9,650 bonds, with about 42% in Treasury and other agency debt, 29% in investment-grade corporates, 24% in MBSes, and the rest in sovereign debt and asset-backed securities.
iShares Core U.S. Aggregate Bond ETF (AGG)
An index fund that tracks the Bloomberg Barclays U.S. Aggregate Bond Index, which is the standard benchmark for most bond funds, AGG is one of the best bond ETFs in the market. The fund’s cost is 0.04%, and the yield is 1.3%.
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, $54.78 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%.
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. The current 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, 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%.
Nuveen ESG U.S. Aggregate Bond ETF (NUBD)
NUBD is a passively managed bond fund that tracks the returns of the Bloomberg Barclays MSCI US Aggregate ESG Select Index. The portfolio includes U.S. government debts, and U.S. corporate bonds, commercial mortgage-backed securities, and other U.S. dollar-based bonds issued by non-U.S. governments and corporations. NUBD’s average duration is 5.73 years, while the current distribution yield is 2.21%, with the expense rate at 0.2%.
BlackRock Strategic Income Opportunities Investor A (BASIX)
This is another actively managed bond mutual fund. Its asset under management is over $31.4 billion, with more than 15% invested in "interest-rate derivatives", about 16% invested in emerging-market bonds, and the rest split among debt such as junk bonds, Treasuries, collateralized loan obligations (CLOs), and more.
With a yield of 1.6%, the fund’s performance is mixed, but the major downside is the high cost — a 1.14% expense rate and a 4% maximum sales charge.
SPDR Portfolio Mortgage-Backed Bond ETF (SPMB)
SPMB is a mortgage-backed securities index ETF that focuses only on U.S. agency mortgage-backed securities. The fund's average duration is 2.41 years, and it offers a 2.97% yield and charges a 0.06% expense rate.
Vanguard Short-Term Investment-Grade Fund (VFSUX)
VFSUX is a short-term bond index that tracks the Bloomberg Barclays U.S. 1-5 Year Credit Bond Index. The fund holds 2,447 bonds with an average duration of 2.6 years, and about 80% is invested in corporate bonds, with the rest in lower-risk government and securitized debt. VFSUX offers a 2.4% distribution yield and charges a 0.1% expense rate.
PIMCO Enhanced Short Maturity Active ETF (MINT)
MINT is an actively managed ETF with more than 800 holdings and about $13.9 capital under management. With 94% invested in bonds with less than a year to maturity and the remaining 6% invested in debt with no more than three years left, MINT has the least risk among all the bond funds we covered. However, the yield is low — 0.9%.
Expert tip on investing in bond funds
Bond funds are a peculiar form of investment in the bond market. Unlike the individual bonds that you can hold till maturity to get your full capital while collecting interest, a bond fund doesn’t have a specified maturity date — you only buy and sell them at the current net asset value (NAV). 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.
Why trade 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
The best bond fund for you depends on your investment goal and risk appetite.
Yes, bond funds offer a diversified bond portfolio managed by a professional.
Anyone who wishes to benefit from the bond market can invest in bond funds.
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.
Yes, bond funds are safe for beginners because they offer a diversified bond portfolio.
According to the Securities Industry and Financial Markets Association, the global bond market (total debt outstanding) is estimated at $100.13 trillion as of 2017.