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Some of The Best Bond ETFs to Buy Now

Some of The Best Bond ETFs to Buy Now

Creating a list of the best bond ETFs for 2022 may include, at first glance, only those funds that can perform well in an inflationary and growth environment. But that would only be partially correct.

Unless the retention period is only a few months, allocating the entire fixed-income mix of your portfolio to funds holding TIPS (Treasury Inflation-Protected Securities) or very short-dated bonds may not be the best and only option. These classic increases in inflation and rates could work well in 2022, but time may be limited for these ideas, especially as they have already split into halves.

However, it is good to keep one eye on the best investments for today and another eye on the best investments for what is to come.

For example, what will the bond market look like in 2023? Based on history, this could be an above-average year. Bonds turned negative in 2021 and started in 2022 in the red. What are the chances of the bonds being negative for the second or third year? Historically, bonds have been negative for two consecutive years, only twice in the last nine decades, and never for 3 consecutive years.

Taking that into account, here are the best bond ETFs for 2022. The names 0featured here will be more than just TIP funds and ultra-short bond funds. Now may be a good time for bond funds, with an average dollar cost, which may be good through late 2022 and beyond, when inflation and interest rates may not threaten not as much bond prices as at the beginning of the year.

Fidelity Total Bond ETF

  • Fund category: Intermediate Core-Plus Bond

  • Assets under management: $2.5 billion

  • SEC Yield: 2.7%

  • Expenses: $0.36 or $36 per year for every $10,000 invested

2022 could be a year for actively managed funds, and the Fidelity Total Bond ETF is one of the good bond ETFs in this space.

As with securities, actively managed bond funds can have benefits over passively managed index funds in specific environments, and 2022 is one of them. For instance, an active fund manager might focus on segments of the bond market, such as higher-quality corporate bonds, which will outperform high-quality Treasury bonds.

To give you a better idea of the FBND portfolio, the fund had 1,902 stocks as of March 31. Compared to a major bond index, the Fidelity Total Bond ETF is slightly more corporately inclined, mortgage-backed securities, and has superior credit quality. It invests 20% of its portfolio in high yield debt securities (also called debentures). While this may be a bit of a higher risk than a passively managed "total bond index" fund, it may also increase the performance of the FBND.

Demonstrating the potential for profitability, the Fidelity Total Bond ETF outperforms the iShares Aggregate Bond Index (AGG) in terms of one- and three-year cumulative returns.

Vanguard Tax-Exempt Bond ETF

  • Fund Category: Muni national intermediate bond

  • Assets under management: $14.4 billion

  • SEC Yield: 2.1%

  • Expenses: 0.05%

For investors who hold bond funds in a taxable account, the Vanguard Tax-Exempt Bond ETF (VTEB, $51.10) may be one of the best bond ETFs of 2022, as it covers a "favorable point" in which yield, yield intersect, and risk.

In a risk-averse environment, high-yield bonds can be very risky for investors. On the other hand, investment-grade bonds generate yields attractive enough to entice buyers even in a low-yield environment.

Additionally, default risks are lower for the more than 6,000 US municipal bonds in the VTEB portfolio, as approximately 75% are rated AA or higher. Indeed, to be included in the portfolio, a security must have at least an investment-grade rating.

Additionally, the average duration of Vanguard's duty-free bonds is 4.6 years, reducing downward pressure on long-term bond funds.

Thus, investors with VTEB get a low-cost, moderate-risk bond fund that can produce above-average returns without above-average risk while remaining tax-efficient.

IShares TIPS Bond ETFs

  • Fund category: Inflation hedged securities

  • Assets under management: $33.4 billion

  • SEC yield: 8.3%

  • Expenses: 0.19%

The iShares TIPS (TIP, $121.63) Bond ETF could be one of the best bond ETFs for 2022, especially if inflation remains high.

Markets move by surprise, and bond prices are no exception. The inflationary advantage of the best investments may have already been reduced. Still, as many hope, a continued increase in the cost of goods and services would increase the return on these investments.

TIP holds Treasury Inflation-Protected Bonds, or TIPS, which are bonds indexed to the Consumer Price Index, a general measure of how fast prices are rising. This means that the principal amount of these bonds is designed to adjust to movements in inflation. Therefore, as inflation increases, the principal value of TIPS increases. But if inflation starts to moderate or even fall in 2022, bond funds such as TIPS could underperform broader bond indices.

Investors should also keep in mind that while TIPS may perform best in times of inflation, they still bear interest rate risk. Therefore, as the Fed continues to raise rates, the market value of the underlying bonds may decline, lowering the net asset value of a fund such as TIP. This is another precursor to TIPS, where rising inflation coupled with rising interest rates may continue to be an unfavorable environment for these bonds.

The SEC's return is a staggering 8.3%, although the number worrying about is the inflation-adjusted real return of -0.5%. This means that the return comes from the gains on these bonds, as they are adjusted for inflation.

That being said, TIP can be a good option for investors who want exposure to fixed stocks in their portfolios for diversification purposes. The iShares TIPS Bond ETF (TIP, $121.63) can also be an alternative or supplement to holding bonds that may not perform well in an inflationary environment.

Vanguard Ultra Short Term Bond Fund

  • Fund Category: Ultra Short Bond

  • Assets under management: $2.4 billion

  • SEC yield: 1.7%

  • Expenses: 0.10%

Vanguard Ultra-Short Bond ETF (VUSB, $49.30) could be one of the best bond ETFs for 2022 for investors who want higher returns than money market stocks while reducing interest rate risk compared to longer-term securities.

According to Bankrate, the average yield in the money market was just 0.07%, while bank savings accounts are lower. Compare that to the 1.7% return on VUSB, and you'll find compelling reasons to consider the benefits of owning a very short-term bond ETF.

To achieve this, VUSB invests in a mix of high and mid-quality fixed-income securities that allow it to maintain a dollar-weighted average maturity of up to two years. Currently, the average maturity of the approximately 750 bonds held in the Vanguard Ultra-Short Bond ETF is one year.

An important caveat for investors to keep in mind about very short-term bond ETFs is that they come with some interest rate risk, although much lower than medium- and long-term bond funds. Therefore, VUSB may not be an ideal alternative to money market and money market funds. Still, it can be a smart diversifier or complement to the fixed income portion of a portfolio.

For benchmarking purposes, the cumulative performance of VUSB NAV as of March 31 was 1.0%. Although this return is much better than -7.9% of the Bloomberg Aggregate Bond Index, it is still negative, and investors should be aware of interest rate risk even on ultra-short bonds.

VanEck Emerging Markets High Yield Bond ETF

  • Fund Category: Emerging Markets Bond

  • Assets under management: $1.2 billion

  • SEC Yield: 7.1%

  • Expenses: 0.40%

Not all bond investors seek stable, average returns. The VanEck Emerging Markets High Yield Bond ETF (HYEM, $19.98) is a potential option for those who want more.

HYEM could be one of the best bond ETFs in 2022 for investors who want to take on higher levels of market risk in exchange for high returns and receive higher returns than an index can produce on the whole market. Investors could look for bonds to return to after the end of the Russian-Ukrainian conflict.

The VanEck Emerging Markets High Yield Bond ETF consists of US dollar-denominated bonds issued by emerging markets below investment grade.

To give you an idea of the HYEM portfolio, the top three countries by share are China with 12.3%, Brazil with 8.9%, and Mexico with 7.5%. 84.6% of the approximately 830 holders have a BB- or B rating in terms of credit quality.

Bottom Line

Economic uncertainty indeed remains in Russia. But investors willing to take risks and buy small positions or the average dollar cost of emerging market bonds could be rewarded twice with high and above-average yields, especially as the Russian-Ukrainian conflict begins to stabilize.



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