Growing one’s wealth, saving for retirement or other big life goals, and achieving financial freedom are great goals. And at the end of the day, for most investors, this is what investing is all about.
But I’d argue that perhaps an even more important goal should be at the forefront of investors’ minds, and that’s being able to sleep well at night. Having an investment portfolio that’s unnecessarily complex or includes investments that are far too volatile for one’s risk preferences can lead to significant anxiety. In this economic environment, with uncertainty picking up by the day, that sort of volatility could lead to massive selloffs during downturns. And the absolute worst thing that can happen in such periods is that investors lose hope and choose to sell at the wrong time.
Most personal finance experts tout the wisdom that staying invested is the most important thing to generate long-term wealth. Missing out on just a few of the biggest days in the market (which often come after severe declines) can wipe out years or decades of growth.
Thus, finding ways to stay invested is important. I’ve found a number of exchange traded funds (ETFs) I think do just that. These funds allow investors to put their capital to work in well-diversified and low-cost vehicles that compound over time, without having to worry to the same degree as holding individual stock picks that may need to be rebalanced consistently.
Here are three of the top bond ETFs It think long-term investors looking for sleep-at-night income should consider.
Vanguard Total Bond Market ETF (BND)
Investors looking for true diversification in the bond market may want to consider the Vanguard Total Bond Market ETF (BND).
This ETF is aimed at owning the widest-possible gamut of investment-grade bonds spanning Treasurys, agency mortgage-backed securities (MBS) and high-quality corporate bonds. In essence, this ETF aims to replicate the returns of the entire U.S. bond market, providing some of the highest-quality exposure in this sector at a rock-bottom cost.
With a dividend yield of nearly 3.8%, this ETF provides a meaningful premium over and above the overnight rate. And for investors who hold broad index ETFs for their equity exposure, this is the ETF I’d pick to match that exposure in the fixed income world.
For those with a decade-long (or longer) time horizon, BND is an excellent option to consider. With a mix of a relatively high up-front yield, and plenty of potential to benefit from interest rates coming down over time, this investment-grade bond ETF is one of those anchor positions I think is worth buying and holding onto long-term.
iShares Core U.S. Aggregate Bond ETF (AGG)
A similar offering, this time with an expense ratio of just 0.03%, is the iShares Core U.S. Aggregate Bond ETF (AGG).
Tracking a similar universe of stocks, the AGG ETF tracks a similar mix of fixed income assets. Currently holding more than $140 billion in assets under management, and providing a slightly higher dividend yield just above 3.8%, this is another excellent option I think is worth considering in lieu of, or in addition to, BND.
Much of the interest rate shock pain has already been felt by this ETF. I’d argue that as interest rates likely decline from here, there could be capital appreciation upside in addition to the solid yield this ETF provides.
Personally, I think equity returns are likely to be relatively muted over the next decade. Thus, my weighting to bonds has increased, and AGG is one top bond ETF I’m looking at right now specifically for this ETF’s Treasury and agency exposure.
Vanguard Short-Term TIPS ETF (VTIP)
For some of the most risk-averse investors, I’d argue that the Vanguard Short-Term TIPS ETF (VTIP) could be the best option to consider.
TIPS stand for treasury inflation protected securities, which are investing vehicles created for those who want to own bonds, but are concerned about the impacts inflation over time could have on their yields. Locking in a 3% dividend yield today doesn’t mean much if inflation averages 4% or more per year for the next decade. In fact, that’s a losing investment for most (outside of the capital appreciation that may come from interest rates declining in a recessionary scenario).
What TIPS provide is Treasury exposure (U.S. government bonds) which have payouts that fluctuate with the rate of inflation over time. If inflation trends higher, these securities will pay more. The inverse is also true.
So, for investors who want to take the other side of the interest rate move bet (thinking that the next interest rate move from the Fed may in fact be a hike), owning a TIPS bond ETF could be the way to go.
This ETF invests specifically in short-duration TIPS, providing less volatility or price resets due to yield changes from the Fed. Thus, if I had to pick one such TIPS-linked ETF right now, this would be my primary choice.