Bonds are a way to loan money to corporations or the government. These entities issue bonds to raise money and you can purchase a bond with a specific interest rate – interest is paid overtime and when the bond matures your initial investment is returned to you.
Bonds can be bought and sold on secondary markets, just like stocks. The price fluctuates based on the interest rate of the bond, current market interest rates, and the bond rating – among other things.
Bond funds are mutual funds and ETFs that invest in bonds. They can be a more efficient way of investing in bonds than buying individual securities as they can expose you to the entire bond market or a subset of bonds. This helps lower the portfolio’s overall volatility and risk through improved diversification.
7 Bond Funds Worth Investing In
Here are some of the best bond funds worth investing in today.
American Funds Bond Fund of America R6 (RBFGX)
The American Funds Bond Fund of America R6 is a good performer with reasonable fees and wide exposure across the taxable bond spectrum.
- Expense Ratio: 0.20%
- 1-Year Performance: -12.48%
- Performance Since Inception: 2,486.23%
- Dividend Yield: 2.98%
The American Funds Bond Fund of America R6 is one of several funds in the American Funds Bond Fund of America family. From one of the most recognized names in actively managed mutual funds, the Bond Fund of America R6 fund is a good performer with reasonable fees and wide exposure across the taxable bond spectrum.
The Bond Fund of America R6 fund offers a risk-conscious portfolio that outperformed many peers during the volatile time of the first quarter of 2020. Between 2016 and 2022, shares gained 1.2% annualized. However, the team can also take on risk when it pays. In 2021, the team added Treasury Inflation-Protected Securities.
RBFGX’s total assets are $70.5 billion.
Related: How to Invest in Bonds: Diversify Your Portfolio
FlexShares Credit-Scored US Corporate Bond ETF (SKOR)
SKOR is a highly-rated and diversified corporate bond fund with reasonable fees.
- Expense Ratio: 0.22%
- 1-Year Performance: -12.30%
- Performance Since Inception: -7.21%
- Dividend Yield: 3.24%
SKOR is a highly-rated and diversified corporate bond fund with reasonable fees. Although FlexShares is a lesser-known fund family, this bond fund is highly rated by analysts. SKOR’s total assets are $236.4 million.
No single debt asset makes up more than 1% of holdings. The top holdings as of this writing are weighted heavily in the financial sector and in the U.S. Top holdings include bonds from Broadcom, Charles Schwab, JPMorgan Chase, Elevance Health, Bank of America, Apple, Fiserv, and Berkshire Hathaway Energy.
iShares Interest Rate Hedge High Yield Bond ETF (HYGH)
HYGH offers relatively low fees for a high-yield bond.
- Expense Ratio: 0.52%
- 1-Year Performance: -3.96%
- Performance Since Inception: -17.08%
- Dividend Yield: 5.49%
If you’re chasing high yields, you’ll pay a little more for active management. This fund stands out in the category, as it is priced within the least expensive fee quintile among peers. It invests at least 80% of its net assets in component securities and instruments in the fund’s underlying index. HYGH’s 12-month yield is 5.3%, which is about average compared to its peers. HYGH’s total assets are $116.1 million.
As of this writing, 96% of holdings are funneled into the iShares iBoxx $ High Yield Corporate Bond ETF (HYG). Major bond holdings over 1% of assets include CCO Holdings, Ford Motor Credit, Tenet Healthcare, CSC Holdings, Transdigm, Dish, and Occidental Petroleum.
Related: What Is the Relationship Between Interest Rates and the Bond Market?
iShares Ultra Short-Term Bond ETF (ICSH)
ICSH is a top pick for short-term bond investments with low fees.
- Expense Ratio: 0.08%
- 1-Year Performance: -0.67%
- Performance Since Inception: 0.04%
- Dividend Yield: 0.63%
ICSH is a top pick for short-term bond investments with low fees. ICSH has a sound investment process and a strong management team and is priced within the lowest fee quintile among peers. ICSH’s total assets are $7.1 billion.
The fund owns nearly 250 holdings, with top debtors including Nextera Energy, Morgan Stanley, Toyota, Truist Bank, Thermo Fisher Scientific, Bank of America, Coca-Cola, Nestle, Credit Suisse, and many others.
JPMorgan Ultra-Short Municipal Inc ETF (JMST)
JMST is a reputable short-term municipal bond fund with reasonable management fees.
- Expense Ratio: 0.18%
- 1-Year Performance: -0.80%
- Performance Since Inception: 1.00%
- Dividend Yield: 0.44%
JMST is a reputable short-term municipal bond fund with reasonable management fees. JMST has restrictions to diversify the portfolio and avoid concentrated sector or state bets. JMST offers cash-plus tax-exempt returns with some predictability. Although JMST was only started in 2018, it has quickly grown to $2.6 billion in total assets.
With over 3,500 holdings, there’s little concentration risk and outstanding diversification. The three portfolio managers are 25-year+ industry veterans who have managed the fund since its inception.
Vanguard Short-Term Inflation-Protected Securities ETF (VTIP)
VTIP offers excellent low-fee funds for inflation protection.
- Expense Ratio: 0.04%
- 1-Year Performance: -3.19%
- Performance Since Inception: 13.92%
- Dividend Yield: 6.34%
VTIP offers excellent low-fee funds for inflation and interest rate protection. VTIP utilizes short-duration Treasury Inflation-Protected Securities, or TIPS. The price of TIPS is indexed to inflation, so if the Consumer Price Index goes up, the price and yield of TIPs will too. VTIP holds TIPS with an average duration of 2.4 years and a yield-to-maturity of 4%. VTIP’s total assets are $17.3 billion.
All bonds owned by VTIP mature in five years or less, with an average of 2.1 years and a 4.67% yield to maturity. It isn’t very exciting, which is what most investors want with TIPS investments.
Vanguard Tax-Exempt Bond ETF (VTEB)
VTEB is a highly rated diversified municipal bond fund offering tax-free returns with rock-bottom fees.
- Expense Ratio: 0.05%
- 1-Year Performance: -7.86%
- Performance Since Inception: 14.53%
- Dividend Yield: 1.93%
VTEB is a highly rated diversified municipal bond fund offering tax-free returns with rock-bottom fees. Its municipal bonds are issued by state and local governments to fund public infrastructure projects and are exempt from federal taxes and certain state taxes. VTEB currently holds 6,670 municipal bonds in the U.S., with California municipal bonds being its largest holdings.
VTEB’s municipal bonds have an average yield-to-maturity of 4.1% and an average duration of 6.1 years. VTEB’s total assets are $23.7 billion.
Related: 6 Best Bond Alternatives
Despite relatively low performance compared to stocks in some years, bond funds remain a vital part of a diversified portfolio because they reduce volatility and produce income. However, you should always research before investing in any fund, including a bond fund, to ensure you know what you’re getting yourself into.