The best bond ETFs are back in fashion after a rough few years.
When Wall Street was booming and key interest rates at the Federal Reserve were near zero, many investors were happily allocating 100% of their portfolio to stocks. And then, in 2022, extreme volatility sparked substantial (and in some cases, record-setting) losses across the bond market.
But bond funds remain a key part to any portfolio. "We still think high-quality bonds play a pivotal role in portfolios as they have shown to be the best diversifier to equity risk," says Lawrence Gillum, fixed-income strategist at independent broker-dealer LPL Financial. "And it's best to have that portfolio protection in place before it's needed."
Bonds are debt securities, where you are investing in a promise by a borrower to pay back the principal value of that loan plus interest. Bonds are issued by local municipalities, the U.S. Treasury, foreign governments, corporations looking for capital, and other similar entities. As benchmark interest rates rise, the borrowing costs for all these institutions also goes up – as do the rates of return on their bonds. And bond ETFs are exchange-traded funds that invest in these fixed-income securities.
To be clear, most investors should never give up on stocks. Over the long term, equity investments are an effective path to growing your money and every diversified portfolio should look across different asset classes. But it has become increasingly apparent over the years that bonds are a very important asset to hold – and one that many investors may be lacking exposure in their holdings.
If you're looking to diversify or reallocate your portfolio mix, these are the best bond ETFs to buy now.
Data is as of Feb. 24. SEC yields reflect the interest earned after deducting fund expenses for the most recent 30-day period and are a standard measure for bond and preferred-stock funds.
