12 bond mutual funds and ETFs to buy for protection

  • By Ellen Chang,
  • Kiplinger
  • Facebook.
  • Twitter.
  • LinkedIn.
  • Print

As the stock market continues to take a beating, nervous investors look to bond mutual funds and exchange-traded funds (ETFs) for protection and sanity. After all, fixed income typically provides regular cash and lower volatility when markets hit turbulence.

And the markets are absolutely hitting turbulence. For instance, between Feb. 19 and March 10, not only did the S&P 500 (.SPX) experience a historically rapid loss of 14.8% – it experienced a dramatic rise in volatility, too, hitting its highest level on that front since 2011, says Jodie Gunzberg, chief investment strategist at New York-based Graystone Consulting, a Morgan Stanley business. The index's losses and volatility have escalated even more since then.

Bonds offer ballast – "not only downside protection but also moderate upside potential as investors tend to seek out the safety of U.S. government and investment-grade corporate bonds amid stock market uncertainty" – says Todd Rosenbluth, senior director of ETF and mutual fund research at CFRA, a New York-based investment research company.

Bond prices often are uncorrelated to equities. Stocks typically do well in periods of economic growth, whereas bonds typically do well in periods of declining economic activity, Gunzberg says.

"Even though the current 30-day correlation has risen between stocks and bonds, the correlation between the S&P 500 and the S&P U.S. Aggregate Bond Index is still negative," she says. "Bonds are strong diversifiers, with the exception of high yield (junk), when added to a portfolio of equities throughout different economic scenarios." Indeed, junk debt has been punished severely of late.

Here are 12 bond mutual funds and bond ETFs to buy. These funds offer diversified portfolios of hundreds if not thousands of bonds, and most primarily rely on debt such as Treasuries and other investment-grade bonds. Just remember: This is an unprecedented environment, and even the bond market is acting unusually in some areas, so be especially mindful of your own risk tolerance.

iShares Core U.S. Aggregate Bond ETF

Assets under management: $71.0 billion

SEC yield: 1.8%

Expenses: 0.05%

Just like S&P 500 trackers such as the iShares Core S&P 500 ETF (IVV) are how you invest in "the market," the iShares Core U.S. Aggregate Bond ETF (AGG) is effectively the way to invest in "the bond market."

AGG is an index fund that tracks the Bloomberg Barclays U.S. Aggregate Bond Index, or the "Agg," which is the standard benchmark for most bond funds. This portfolio of more than 7,600 bonds is heaviest in Treasuries, at a 42% weight, but also has significant exposure to mortgage-backed securities (MBSes, 28%) and corporate debt (24%), as well as sprinklings of agency, sovereign, local authority and other bonds.

This is an extremely high-credit-quality portfolio that has nearly 75% of its assets in AAA debt, the highest rating possible. The rest is invested in other levels of investment-grade bonds. That makes AGG one of the best bond ETFs if you're looking for something simple, cheap and relatively stable compared to stocks.

Vanguard Total Bond Market ETF

Assets under management: $50.7 billion

SEC yield: 1.9%

Expenses: 0.035%

The Vanguard Total Bond Market ETF (BND) is another name in broad-exposure bond funds. It targets U.S. investment-grade bonds and is geared for investors with medium- or long-term goals.

"Total" bond ETFs like BND incorporate a wide spectrum of fixed-income investments in a passively managed vehicle, says Mike Loewengart, managing director of investment strategy at online brokerage firm E*Trade Financial.

"Fixed-income investments can add ballast to your portfolio, especially during wild market swings," he says. "Investors leverage bonds because they are more predictable than equity investments, albeit a bit more boring, which turns off some investors."

BND holds roughly 9,200 bonds, with about 44% of those holdings in Treasury and other agency debt, 27% in investment-grade corporates, 24% in MBSes and the rest sprinkled across bonds such as sovereign debt and asset-backed securities (ABSes). It's also available as a mutual fund (VBTLX).

iShares Core Total USD Bond Market ETF

Assets under management: $4.6 billion

SEC yield: 2.1%

Expenses: 0.06%, or $6 on a $10,000 investment*

The iShares Core Total USD Bond Market ETF (IUSB) is a another strong core bond fund that provides a blend of primarily investment-grade debt, but it also has some exposure to higher-yield bonds that AGG doesn't.

IUSB's portfolio, which includes more than 9,300 bonds, is most heavily weighted in Treasuries, at nearly 36% of the fund's assets. Another quarter of IUSB's assets are invested in investment-grade corporate debt from the likes of AT&T (T) and JPMorgan Chase (JPM), and another quarter is in mortgage-backed securities (MBSes). The rest is sprinkled among agency bonds, international sovereign debt and other types of bonds.

This indexed ETF does have a "slight exposure to high-yield bonds, which tend to do better in a risk-on environment," CFRA's Rosenbluth says. But otherwise, nearly 93% of this bond ETF's holdings are investment-grade, including a 63% slug in AAA-rated bonds.

The yield, at 2%, is about on par with the S&P 500 right now. But IUSB has been far, far less volatile than the blue-chip stock index, losing 4.5% over the past month versus the S&P's 25%.

* Includes a 1-basis-point fee waiver. (A basis point is one one-hundredth of a percent.)

iShares U.S. Treasury Bond ETF

Assets under management: $16.5 billion

SEC yield: 0.9%

Expenses: 0.15%

If you're looking to focus more on stability than potential for returns or high yield, one place to look is U.S. Treasuries, which are among the highest-rated bonds on the planet and have weathered the downturn beautifully so far.

Bond ETFs like the iShares U.S. Treasury Bond ETF (GOVT) give investors direct exposure to U.S. Treasuries. GOVT's holdings range from less than one year to maturity to more than 20 years. Roughly half of the fund is invested in bonds with one to five years left to maturity, another 28% is in bonds with five to 10 years left, and most of the rest is in Treasuries with 20 or more years remaining.

Over the past month, GOVT has actually produced a 3% gain as investors hunker down in safety plays. Just note that an already low yield, as well as little room for yields to go further south, really limit the upside price potential in this bond ETF. But it still might be an ideal place for investors looking for stability and just a little bit of income.

SPDR Bloomberg Barclays 1-3 Month T-Bill ETF

Assets under management: $15.3 billion

SEC yield: 1.2%

Expenses: 0.136%

This is a tricky time to be buying bonds since "yields are in a race toward zero," says Charles Sizemore, a portfolio manager for Interactive Advisors, an RIA based in Boston.

"Buying longer-term bonds at these prices exposes you to interest-rate risk. If yields bounce off of these historic lows, bond prices will fall," he says. "Given that yields are modest across the bond universe, it makes sense to focus on safety rather than reach for a slightly higher yield that won't really move the needle that much anyway."

In an environment like this, Sizemore believes it makes sense to stay in bonds with shorter-term maturity. The SPDR Bloomberg Barclays 1-3 Month T-Bill ETF (BIL) is a liquid way to get access to the short end of the yield curve. It invests in an extremely tight portfolio of just 15 bond issues with thin maturities of between one and three months – good for the truly risk-averse. BIL hardly moves in good markets and in bad. Over the past month, for instance, BIL has gained 0.2%, with a chart that looks like a straight line compared to most major bond and stock market indices alike.

"The yield is a moving target and may approach zero soon due the Federal Reserve slashing rates," Sizemore says. "But you have essentially no interest-rate risk and you're parked in the safest corner of the bond market."

PIMCO Enhanced Short Maturity Active ETF

Assets under management: $13.9 billion

SEC yield: 1.9%

Expenses: 0.36%

If you prefer to have a human overseeing your short-term bond investments, you can look to actively managed ETFs such as PIMCO Enhanced Short Maturity Active ETF (MINT).

Like BIL, MINT is among the more conservative bond ETFs you can buy. The fund currently has more than 840 holdings, with a stated goal of "capital preservation, liquidity and stronger return potential relative to traditional cash investments."

The trade-off? A little bit more risk than, say, a savings account or money-market fund – but far less risk than most other bond funds. The ETF's 840-plus holdings are 93% invested in bonds with less than a year to maturity, with the remaining 7% invested in debt with no more than three years left. More than 75% of the fund's bonds have investment-grade credit ratings – the majority of that is investment-grade corporate debt, though it also includes Treasuries and other bonds.

MINT offers a "relatively attractive yield given its minimal interest-rate risk and can be a stronger alternative to sitting on the sidelines," CFRA's Rosenbluth says.

Vanguard Short-Term Corporate Bond Index Fund ETF

Assets under management: $23.2 billion

SEC yield: 1.9%

Expenses: 0.05%

Another way to invest in short-term debt is the Vanguard Short-Term Corporate Bond Index Fund ETF Shares (VCSH).

Given the financial damage happening to even good publicly traded companies, corporate bond funds – even ones that hold investment-grade debt – are hardly bulletproof. Thus, it's worth pointing out that 90% of the bonds in VCSH are in the A or BBB range, the lower of the four investment-grade tiers.

"But given that the holdings are investment grade bonds with only five years or less to maturity, your risk is tolerably low," Sizemore says. Indeed, the average maturity of bonds in the fund is just under three years.

The yield of 1.9% is decent, albeit unspectacular. However, relative stability and an uber-cheap expense ratio make VCSH a decent place to wait out the volatility. If you prefer mutual funds, Vanguard offers an Admiral-class version (VSCSX).

Vanguard Intermediate-Term Bond ETF

Assets under management: $12.7 billion

SEC yield: 1.6%

Expenses: 0.07%

The Vanguard Intermediate-Term Bond ETF (BIV) is an "in the middle fund" that invests exclusively in intermediate-term, investment-grade debt.

It's another index fund, this time investing in bonds with maturities between five and 10 years. More than half the fund is invested in Treasuries and other U.S. government bonds, with another 40% in investment-grade corporates, and most of the rest in foreign sovereigns.

The idea here is to provide more yield than in similarly constructed funds, though at the moment, BIV's yield is actually lower than many shorter-term funds. Year-to-date, however, it's essentially trading flat versus a 1%-plus decline for the "Agg" benchmark. It also has a mutual fund version (VBILX).

Vanguard Long-Term Bond ETF

Assets under management: $5.1 billion

SEC yield: 2.6%

Expenses: 0.07%

If you do want to roll the dice on longer-term investments for a little more yield, bond ETFs such as the Vanguard Long-Term Bond ETF (BLV) can get the job done.

The roughly 2,500-bond portfolio is heaviest in investment-grade corporate debt (48%), followed by Treasury/agency bonds (44%). Almost all of the rest of BLV's assets are used to hold investment-grade international sovereign debt.

The added risk comes in the form of longer maturity. Three-quarters of the fund is invested in bonds maturing in 20 to 30 years, 22% is in the 10-to-20 range, 3% is in bonds with 30-plus years remaining, and the rest is in the five-to-10 range. Because there's more of a chance these bonds won't get paid off than bonds that expire, say, a year from now, that means this fund can rise and fall a lot more than funds like MINT that deal in short-term debt.

But the higher yield might be tempting to some investors.

"With interest rates compressing and the 10-year Treasury at an all-time low, investors might consider adding a long-term bond fund to their portfolio like Vanguard's Long-Term Bond Fund," says Daren Blonski, managing principal of Sonoma Wealth Advisors in California. "Unless you see interest rates rising in the near future, owning a long-term bond fund can provide substantially more income to your portfolio. If interest rates do rise, a long term bond fund would underperform."

Like many other Vanguard bond ETFs, BLV trades as a mutual fund, too (VBLAX).

Vanguard Core Bond Fund Investor

Assets under management: $1.6 billion

SEC yield: 2.0%

Expenses: 0.25%

Investors looking for an actively managed core bond mutual fund can look to Vanguard Core Bond Fund Investor (VCORX).

VCORX invests across the spectrum of investment-grade debt, and it does so across bonds in a wide range of maturities. The portfolio includes slightly more than a thousand bonds at the moment, with an average effective maturity of 7.6 years.

Government mortgage-backed securities are the largest chunk of holdings at 31%, followed by investment-grade corporates (28%) and Treasuries (24%). But it has several other sprinklings of less than 5%, including foreign sovereign bonds, asset-backed securities and short-term reserves.

It’s a young fund that only got its start back in 2016, but so far it’s doing well, with a three-year total return of 13.4% that’s more than two percentage points better than the AGG ETF’s total return. And this actively managed fund is priced like an index fund at 0.25% in annual fees.

DoubleLine Total Return Bond Fund Class N

Assets under management: $55.3 billion

SEC yield: 2.99%

Expenses: 0.73%

Managed by well-known bond portfolio manager Jeffrey Gundlach, the DoubleLine Total Return Bond Fund Class N (DLTNX) acts as a "nice diversifier to core fixed income while providing current income without overstretching in quality for higher yield and strong risk-adjusted returns in varying market and interest-rate environments," says Nicole Tanenbaum, partner and chief investment strategist at Chequers Financial Management, a San Francisco-based financial planning firm.

While DLTNX is a "total return" fund, its primary vehicle is mortgage-backed securities. More than 80% of the bond mutual fund's assets are invested in these right now, with the rest sprinkled among debt such as Treasuries and other asset-backed securities, as well as cash.

"In today's persistent low-yield environment, many investors had been drifting away from safer core bond holdings toward riskier, high-yield credit given the more attractive yields they offer," Tanenbaum says. "While it may be tempting to reach for these higher yields to generate more income, it is critical for investors to fully understand the underlying credit quality of the bonds they are choosing to receive that higher yield."

The retail-class N shares we list here require a $2,000 minimum investment in normal accounts or $500 in an IRA. You can invest in the lower-expense institutional-class shares (DBLTX, 0.48% annual fees) with a $100,000 minimum investment in normal accounts, or a $5,000 minimum investment in an IRA.

BlackRock Strategic Income Opportunities Investor A

Assets under management: $31 billion

SEC yield: 2.4%

Expenses: 1.10%

The BlackRock Strategic Income Opportunities Investor A (BASIX) is an actively managed bond mutual fund that should complement core bond exposure to increase your risk-adjusted returns. Managers Rick Reider, Bob Miller and David Rogal have been with the fund for varying amounts of time, with Reider boasting the longest tenure in BASIX at roughly a decade.

This isn't your garden-variety bond fund. A little more than 20% of BASIX's assets are invested in "interest-rate derivatives" – hedges that institutional investors use against movements in interest rates. Another 19% is invested in emerging-market bonds, and the rest is split among debt such as junk bonds, Treasuries, collateralized loan obligations and more.

Performance is a mixed bag against the "Agg" bond index, though it's far less volatile than both the market and even the Nontraditional Bond category. But one thing weighing down its performance is high costs – not just a 1.1% expense ratio, but also a 4% maximum sales charge. But you can get around this if you have access to the Institutional shares (BSIIX), which have no sales charge and a 0.62% annual fee.

While an individual using a regular account would need to scrape together a whopping $2 million minimum initial investment, investors whose assets are managed by independent financial advisors might be able to access this share class for a far more reasonable minimum investment. You also might be able to access BSIIX via your 401(k) or other employer-sponsored retirement plan.

  • Facebook.
  • Twitter.
  • LinkedIn.
  • Print

For more news you can use to help guide your financial life, visit our Insights page.


© 2020 The Kiplinger Washington Editors, Inc.
Votes are submitted voluntarily by individuals and reflect their own opinion of the article's helpfulness. A percentage value for helpfulness will display once a sufficient number of votes have been submitted.
close
Please enter a valid e-mail address
Please enter a valid e-mail address
Important legal information about the e-mail you will be sending. By using this service, you agree to input your real e-mail address and only send it to people you know. It is a violation of law in some jurisdictions to falsely identify yourself in an e-mail. All information you provide will be used by Fidelity solely for the purpose of sending the e-mail on your behalf.The subject line of the e-mail you send will be "Fidelity.com: "

Your e-mail has been sent.
close

Your e-mail has been sent.