Bond Market Index ETFs for Long-Term Investors

Bond Market Index ETFs are a great option for long-term investors who want to diversify their portfolios and earn regular income. They track a specific bond market index, such as the Bloomberg Barclays US Aggregate Bond Index.

These ETFs offer broad diversification, as they hold a large basket of bonds with different maturities, credit qualities, and sectors. This can help reduce risk and increase potential returns over the long term.

One of the key benefits of bond market index ETFs is their low cost, which can be as low as 0.05% of the fund's net assets. This is significantly lower than actively managed bond funds, which can charge 1% or more in fees.

By investing in a bond market index ETF, you can earn regular income through dividends and interest payments, which can be reinvested to generate even more returns.

For another approach, see: Long Term Equity Anticipation Security

The management fee for many bond market index ETFs is around 0.06%. This fee is typically charged as a percentage of the fund's assets.

You may be wondering how this fee affects your investment. Let's take a look at some examples.

Here's a breakdown of the fees and expenses for some bond market index ETFs:

Some popular bond market index ETFs, such as BND and AGG, have an expense ratio of 0.03%. This is lower than the 0.06% expense ratio mentioned earlier, so it's worth considering these options if you're looking to save on fees.

Ideal investors for bond market index ETFs are retirement-conscious individuals or those seeking high-grade domestic bond exposure. These funds are not suited for younger or more aggressive traders due to low yields and small returns.

The iShares iBoxx $ Investment Grade Corporate Bond ETF (LQD) offers a different approach by excluding government bonds, allowing investors to increase yield without taking excessive risk. This fund owns debt instruments from companies with strong credit ratings, such as JPMorgan Chase & Co, UnitedHealth Group, and Verizon Communications.

Investors can choose from a range of commission-free bond ETFs with low expense ratios, such as those offered by Fidelity and iShares. These ETFs can be purchased online with low costs, helping to generate income.

Fidelity and iShares offer a diverse lineup of bond ETFs, including the Fidelity Total Bond ETF and the iShares Core US Aggregate Bond ETF. These funds can help add stability to an equity allocation by covering the broad market.

For those seeking higher income, high-yield bonds, emerging market debt, or income securities ETFs can be considered. The iShares iBoxx $ High Yield Corporate Bond ETF and the iShares J.P. Morgan USD Emerging Markets Bond ETF are examples of these types of funds.

Short duration bond ETFs can help investors earn more from their cash. The Fidelity Low Duration Bond Factor ETF and the iShares Short Maturity Bond ETF are options in this category.

The holdings of a bond market index ETF can vary significantly depending on the fund's focus. The iShares iBoxx $ Investment Grade Corporate Bond ETF, for example, owns debt instruments solely from companies with strong credit ratings that are BBB or above.

These companies include familiar names like JPMorgan Chase & Co (JPM), UnitedHealth Group (UNH), and Verizon Communications (VZ). They're world-class organizations with strong credit ratings, but their debt is still riskier than U.S. Treasury bonds.

The Vanguard Short-Term Bond ETF, on the other hand, is split about 70%-30% between government bonds and investment-grade corporates. Its top holding is short-term U.S. Treasury bonds, which have a much lower risk profile than corporate bonds.

Here's a look at the top holdings of the iShares iBoxx $ Investment Grade Corporate Bond ETF and the Vanguard Short-Term Bond ETF:

The iShares iBoxx $ Investment Grade Corporate Bond ETF also holds a significant portion of debt from other companies, including Federal National Mortgage Association, Federal Home Loan Mortgage Corporation, and Government National Mortgage Association II.

Suggestion: Ishares National Amt Free Muni Bond Etf

The performance of bond market index ETFs can be a bit complex, but let's break it down. iShares had an average annual return of 1.34% over the past 10 years, compared to Vanguard's 1.35%.

iShares tends to be the more expensive fund, which means Vanguard probably demonstrated stronger true performance by a very small margin. Consumer prices have been rising, with a 9.1% increase over the year ended June 2022, the largest increase in 40 years.

According to Morningstar, both iShares and Vanguard have received three-star ratings, indicating generally positive expert opinion, but not overwhelmingly so.

The Bottom Line is where things get really clear. Both the Vanguard Total Bond Market ETF (BND) and the iShares Core U.S. Aggregate Bond ETF (AGG) have very low expense ratios, which is a big plus for investors.

These ETFs are passively managed, which means they don't have a team of fund managers trying to beat the market. This approach can be a smart way to save money on fees.

Both BND and AGG offer broad coverage of various bond types, but they track to different indices. This means that their performance can be similar, but not identical.

In general, both ETFs have similar performance, which is a good thing for investors who want to spread their risk.

As of December 2023, iShares had an average annual return of 1.34% over the past 10 years, compared to Vanguard's of 1.35%. The iShares ETF has tended to be the more expensive fund over that period, so the Vanguard ETF probably demonstrated stronger true performance by a very small margin.

Expert opinion is almost universally positive for both funds, though rarely overwhelming. Morningstar awards three stars to each of these ETFs.

Here's a comparison of the two funds' performance:

It's worth noting that the Bureau of Labor Statistics reported a 9.1% increase in consumer prices over the year ended June 2022, the largest increase in 40 years, which could have impacted bond market performance.

Bond-backed funds like the iShares Core U.S. Aggregate Bond ETF and the Vanguard Total Bond Market ETF are indirectly exposed to counterparty risks in their underlying portfolios.

As of November 2023, 3.01% of the iShares Core U.S. Aggregate Bond ETF was in AAA-rated bonds and 72.2% were in AA-rated bonds. Alternatively, 67% of the Vanguard Total Bond Market ETF was in government bonds.

Neither bond tends to hold any bond rated less than BBB, which is a relatively safe rating.

Inflation risk is a larger concern for bond ETFs, as Treasury-heavy bond ETFs may or may not have yields that are equal to or higher than inflation.

See what others are reading: Inflation Index Etf

Tax considerations are a crucial aspect of investing in AGG. Tax implications should be a significant consideration for any ETF investments.

AGG can produce taxable income from dividends. You can also be taxed on capital gains taxes upon selling shares.

Tax on capital gains may be assessed at a short-term capital gains rate or long-term capital gains rate.

Take a look at this: Ishares Short-term National Muni Bond Etf

Both BND and AGG are passively managed ETFs, which means they aim to reduce total fund costs by minimizing expenses.

Passive investment strategies like these have become less expensive investments due to competition among asset managers.

The Bloomberg U.S. Aggregate Bond Index is the leading yardstick for domestic bond performance, and both ETFs track this index.

However, Vanguard's BND follows a float-adjusted version of the index, whereas AGG tracks the original index.

The Bloomberg Aggregate Bond Index is a market value-weighted collection of the whole U.S. bond market, excluding municipal bonds, Treasury inflation-protected securities (TIPS), and high-yield bonds.

This means that BND and AGG focus on the core U.S. bond market, leaving out certain types of bonds.

By tracking the same index, both ETFs offer similar investment strategies, but with slight differences in their approach.

Check this out: Aggregate Bond Index Etf

For retirement-conscious investors, either the iShares Core U.S. Aggregate Bond ETF or the Vanguard Total Bond Market ETF can be a great core holding.

These funds are suitable for investors looking for high-grade domestic bond exposure.

Low yields and small returns make them a poor fit for younger or more aggressive traders.

The bond market index ETF provides exposure to a broad range of bonds, often tracking a specific bond market index.

These indices can include the Bloomberg Barclays US Aggregate Bond Index, which covers around 9,000 investment-grade bonds.

The bond market index ETF typically tracks a specific bond market index, such as the Bloomberg Barclays US Aggregate Bond Index, which covers around 9,000 investment-grade bonds.

Investors can choose from a variety of bond market index ETFs, each with its own unique characteristics and investment objectives.

These ETFs often have low expense ratios, making them an attractive option for investors seeking to add bond exposure to their portfolios.

By tracking a bond market index, the bond market index ETF provides broad diversification and can help reduce risk.

Consider reading: Bloomberg Aggregate Bond Index Etf