3 Great Bond ETFs

Solid core options to anchor your portfolio.

Daniel Sotiroff 15 August, 2023 | 4:28AM
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A plant growing in coins

Despite a rough showing in 2022, bonds remain a relatively stable asset class and a staple of many investors’ long-term portfolios. The three ETFs for today all fit that mold. Each has their own nuances, but any of them could fit into a reasonably constructed portfolio to help control risk.

3 Great Bond ETFs

  1. Vanguard Total Bond Market ETF BND
  2. iShares Broad USD Investment Grade Corporate Bond ETF USIG
  3. Dimensional Core Fixed Income ETF DFCF

At the top of my list is one of the biggest bond funds in the intermediate core bond category. Gold-rated Vanguard Total Bond Market ETF BND, levies a fee of just 3 basis points per year for a broad slice of the U.S. bond market. This ETF simply follows the contours of the bond market, and its razor-thin fee of 3 basis points per year is its biggest advantage.

BND has a downside. Its portfolio composition depends on the types of bonds issued by the U.S. government, corporations, and other entities that it invests in. That means its exposure to interest-rate risk can change over time. Bonds with longer maturities have a greater presence in the market today than they did 10 years ago, increasing BND’s sensitivity to interest-rate changes.

That said, its 3-basis-point expense ratio and broad scope make it a top pick in the intermediate core bond category. It’s an excellent starting point for anyone looking for a straightforward route to access the bond market.

Silver-rated iShares Broad USD Investment Grade Corporate Bond ETF USIG is the second ETF on my list. As its name implies it offers a broad portfolio of investment-grade corporate bonds of all maturities.

Sticking to corporate bonds means this fund will be a little riskier than BND, even though its constituents carry investment-grade marks. An acute focus on corporate bonds makes it more susceptible to widening credit spreads. But the yield tends to be a little bit higher to compensate for that additional risk. USIG’s yield to maturity was about three quarters of a percentage [point] higher than BND at the end of June.

The third ETF is a new kid on the fixed-income block. Dimensional Core Fixed Income ETF DFCF was one of our top new ETFs for 2021. Despite its short track record, the underlying process used to select and weight bonds has been used for decades by Dimensional’s PMs.

Like BND, the managers provide exposure to some of the largest segments of the U.S. bond market. The portfolio features a mix of government bonds, investment-grade corporate bonds, and mortgage-backed securities, but it stretches a little further than BND to include some foreign bonds as well.

Unlike BND and USIG, the managers don’t track an index. They have some flexibility to steer the portfolio toward bonds with higher expected returns that should improve long-term performance. They’ll increase exposure to those with longer maturities and lower credit ratings when they’re priced to deliver better returns than others in the market.

At the end of June, DFCF had a modestly higher allocation to investment-grade bonds with lower credit ratings. It also tilted toward those with shorter maturities. That all adds up to a modestly higher yield than BND. At the end of June, its yield to maturity was about one quarter of a percentage point higher.

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar Rating
Dimensional Core Fixed Income ETF41.64 USD0.00
iShares Broad USD Invm Grd Corp Bd ETF50.31 USD-0.22Rating
Vanguard Total Bond Market ETF72.05 USD-0.18Rating

About Author

Daniel Sotiroff

Daniel Sotiroff  is a manager research analyst for Morningstar.

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