Stocks aren’t for everyone. Their values can fluctuate wildly based on factors you can’t control. Once you’ve been burned by the stock market, even low levels of stock price volatility can send you into a panic.
If you’d rather not absorb that stress, you might try bond ETFs instead. Bond ETFs don’t have the growth potential of stocks or stock ETFs, but they are more stable. They generate regular income payments and, when you choose the right fund, are fairly low risk.
Here’s a look at the different types of bond ETFs out there, plus seven popular bond ETFs that may suit your investment needs.
Different types of bond ETFs
Treasury bond ETFs: The safest of bond ETFs, these funds hold bonds issued by the U.S. government.
Corporate bond ETFs: Corporate bonds are issued by companies. They pay higher yields than Treasuries, but there is a higher risk of default. An ETF mitigates that default risk somewhat because the portfolio is diversified across many corporate issuers.
Municipal bond ETFs: Municipal bonds are issued by state or city governments and provide income that is exempt from federal taxes. State taxes may apply, depending on where you live and where the ETF invests.
International bond ETFs: These ETFs hold bonds issued by governments or companies located outside the U.S.
Bond ETFs can specialize further by maturity and risk level. For example, you can buy a Treasury bond ETF that only holds short-term, intermediate-term, or long-term bonds. Or you can buy corporate or municipal bond ETFs that limit their portfolios to high-quality, investment-grade issuers.
At the other end of the spectrum, you could invest in junk bond ETFs. These probably aren’t for you if you’re trying to limit risk, but they can deliver strong yields.
If you’d prefer broader exposure across multiple issuer types and/or maturities, you could invest in a total bond market ETF. These funds combine government and corporate bonds of varying maturities into one portfolio.
7 popular bond ETFs
The table below highlights seven popular bond ETFs. All have net assets of over $15 billion.
30-Day SEC Yield
iShares U.S. Treasury Bond ETF (NYSEMKT: GOVT)
U.S. Treasury bonds with varying maturities
Vanguard Short-Term Corporate Bond ETF (NASDAQ: VCSH)
Investment-grade corporate bonds with maturities of five years or less
iShares iBoxx USD Investment Grade Corporate Bond ETF (NYSEMKT: LQD)
Investment-grade corporate bonds with varying maturities
Vanguard Long-Term Corporate Bond ETF (NASDAQ: VCLT)
Investment-grade corporate bonds with maturities of 10 to 25 years
iShares National Muni Bond ETF (NYSEMKT: MUB)
Investment-grade municipal bonds with varying maturities
0.89% (or 1.58% on a tax-equivalent basis)
Vanguard Total Bond Market ETF (NASDAQ: BND)
Investment-grade government and corporate bonds with varying maturities
Vanguard Total International Bond ETF (NASDAQ: BNDX)
Tracks the performance of the Bloomberg Global Aggregate ex-USD Float Adjusted RIC Capped Index, hedged to minimize exchange rate risk. Varied maturities.
As you can see in the table, the long-term corporate bond ETF produces the highest yield among all these picks, including the other two corporate bond funds.
Longer maturities tend to have higher yields because they are more sensitive to interest rate changes. If prevailing interest rates rise, the older, long-term bonds with lower-than-market coupon rates become less interesting to investors. Demand will drop, which pushes the secondary market value down, too.
Shorter-term bonds, on the other hand, get repriced (or paid off) more often because they reach maturity faster. At repricing, the rate is adjusted to whatever the market demands at that time.
Bond ETFs for stability and diversification
If the stock market‘s ups and downs aren’t for you, you might try bond ETFs. They yield more than you’d earn in a cash account and they’re less volatile than stock ETFs.
Try combining different types of bond ETFs to diversify and customize your risk level and yield. U.S. Treasury bond funds with short maturities are the safest, while junk bond ETFs are the riskiest but have higher yields. Your sweet spot could be in the middle of that spectrum — some mix of Treasury and higher quality corporate bonds for stability and yield.
10 stocks we like better than iShares Barclays U.S. Treasury Bond Fund
When our award-winning analyst team has a stock tip, it can pay to listen. After all, the newsletter they have run for over a decade, Motley Fool Stock Advisor, has tripled the market.*
They just revealed what they believe are the ten best stocks for investors to buy right now… and iShares Barclays U.S. Treasury Bond Fund wasn’t one of them! That’s right — they think these 10 stocks are even better buys.
*Stock Advisor returns as of November 10, 2021