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Bond Funds and ETFs

Bond Fund Shortlist

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Bond Fund Shortlist

This is a working toolkit: specific bond funds that have low costs, transparent holdings, strong track records, and are widely available to retail investors. Most investors need only 3–5 of these funds. This is not an exhaustive list; it is a shortlist of the most reliable options.

Key takeaways​

  • A basic portfolio needs just two funds: one for Treasuries or aggregates, one for corporates or diversification
  • Low-cost passive ETFs (0.03–0.10% expense ratio) are the foundation; active funds rarely justify higher costs
  • Choose by market segment and hold to avoid overlap and redundancy
  • Consider total bond allocation (usually 20–50% for equity investors) before deciding which funds to use
  • Rebalance annually to maintain target allocation; don't chase recent performance

The core toolkit (for most investors)​

1. Broad Aggregate Bond Fund: BND or AGG​

BND (Vanguard Total Bond Market ETF)

  • Expense ratio: 0.03%
  • Holdings: ~6,000 bonds (Treasuries, corporates, mortgage-backed securities)
  • Weighted average maturity: ~6 years
  • Yield (2024 environment): ~4.5%
  • Why: Lowest cost, broadest diversification, most passive index replication

AGG (iShares Core US Aggregate Bond ETF)

  • Expense ratio: 0.03%
  • Holdings: ~9,000 bonds (same universe as BND)
  • Weighted average maturity: ~6 years
  • Yield (2024 environment): ~4.5%
  • Why: Identical economics to BND; equivalent choice

Pick one: BND and AGG are functionally equivalent. Choose based on broker (some prefer Vanguard, some iShares) or existing account holdings. For most investors, BND is the default because Vanguard has the tightest administration.

If you're in a 401k plan, check what's available. Many plans offer a "bond index fund" that replicates BND or AGG. Use that if available.

Allocation: 20–60% of bond portfolio (depending on risk tolerance and age). For a 60/40 stock/bond portfolio, this would be 12–24% of total assets.

2. Treasury-Only Fund (Optional, for Conservative Investors)​

IEF (iShares 7–10 Year Treasury ETF)

  • Expense ratio: 0.07%
  • Duration: ~7 years
  • Holdings: U.S. Treasuries with 7–10 years to maturity
  • Yield (2024 environment): ~4.2%
  • Why: Lower credit risk than aggregate; good for ultra-conservative investors

SHV (iShares Short Treasury ETF)

  • Expense ratio: 0.04%
  • Duration: ~1.6 years
  • Holdings: U.S. Treasuries with 1–3 years to maturity
  • Yield (2024 environment): ~5.2% (short-term rates are higher than long-term)
  • Why: Very low volatility; good as emergency cash replacement for conservative investors

TLT (iShares 20+ Year Treasury ETF)

  • Expense ratio: 0.06%
  • Duration: ~17 years
  • Holdings: U.S. Treasuries with 20+ years to maturity
  • Yield (2024 environment): ~4.0%
  • Why: For investors expecting falling rates; captures duration gains. Very volatile.

When to use: Only if you have a specific reason to avoid corporates (e.g., very conservative retiree, expecting recession). Most investors are better off with BND/AGG, which already holds significant Treasuries (40–50% allocation).

Allocation: 0–20% of bond portfolio (most investors don't need a separate Treasury fund).

3. Corporate Bond Fund (for Diversification or Income)​

LQD (iShares Investment Grade Corporate Bond ETF)

  • Expense ratio: 0.06%
  • Holdings: ~2,000 investment-grade corporate bonds
  • Duration: ~7 years
  • Yield (2024 environment): ~5.0%
  • Why: Tight spreads on large corporate issuers; reasonable cost

VCIT (Vanguard Intermediate-Term Corporate Bond Index Fund)

  • Expense ratio: 0.05%
  • Holdings: ~2,500 intermediate corporate bonds
  • Duration: ~5 years
  • Yield (2024 environment): ~4.8%
  • Why: Slightly shorter duration than LQD; comparable cost

VCEB (Vanguard Corporate Bond Index Fund)

  • Expense ratio: 0.05%
  • Holdings: ~2,000 corporate bonds (all maturities, mix of investment-grade and high-yield)
  • Duration: ~6 years
  • Yield (2024 environment): ~5.2%
  • Why: Broader exposure than LQD; includes some high-yield for yield pickup

Pick one: VCIT (or VCEB) is cheaper than LQD. For most investors, VCIT is the best choice (intermediate duration, low cost). LQD is fine if you prefer Treasuries + LQD (simpler portfolio) over BND alone.

Allocation: 0–30% of bond portfolio. Most investors using BND don't need a separate corporate fund (BND already has 30–40% corporates). Use this if you want higher yield or lower interest rate risk (shorter duration via VCIT).

4. High-Yield Bond Fund (for Aggressive Investors Only)​

HYG (iShares High Yield Corporate Bond ETF)

  • Expense ratio: 0.49%
  • Holdings: ~1,200 junk-rated corporate bonds (BB and below)
  • Duration: ~4 years
  • Yield (2024 environment): ~7.5%
  • Why: High income; reasonable cost for the category

ANGL (iShares Fallen Angels High Yield Bond ETF)

  • Expense ratio: 0.40%
  • Holdings: Bonds that recently fell from investment-grade to high-yield
  • Duration: ~5 years
  • Yield (2024 environment): ~7.0%
  • Why: Fallen angels have better credit profiles than typical junk bonds

VWOB (Vanguard High-Yield Bond Index Fund)

  • Expense ratio: 0.08%
  • Holdings: ~1,800 high-yield bonds
  • Duration: ~4 years
  • Yield (2024 environment): ~7.8%
  • Why: Lowest cost in category; broadest diversification

Pick one: VWOB, because it's by far the cheapest. HYG and ANGL are more expensive (0.40–0.49% vs. 0.08%), which at 7% yields means paying 0.5–0.7% for active management or specialty positioning. Not justified.

Allocation: 0–20% of bond portfolio. Use only if comfortable with default risk and shorter duration. Inappropriate for conservative investors or those who need predictable returns.

When to use: In an economic expansion (2021–2022 was ideal; 2020 and 2023 were poor). Not suitable as core holding in all environments. If you want any high-yield exposure, this should be a small position (under 10% of bonds).

5. Municipal Bond Fund (for High-Income Taxpayers Only)​

MUB (iShares National Muni Bond ETF)

  • Expense ratio: 0.05%
  • Holdings: ~2,000 municipal bonds issued across all U.S. states
  • Tax treatment: Federal income tax-free (state varies)
  • Yield (2024 environment, pre-tax): ~4.5%; after-tax (federal 37%, state 10%): ~2.5%
  • Why: Low cost; broad diversification across all states

VMLX (Vanguard Tax-Exempt Bond Fund)

  • Expense ratio: 0.06%
  • Holdings: ~3,000 municipal bonds
  • Tax treatment: Federal income tax-free
  • Yield (2024 environment, pre-tax): ~4.4%; after-tax: ~2.4%
  • Why: Mutual fund (not ETF); good in large accounts

When to use: Only if in a high tax bracket (37% federal + 8%+ state = 45%+ combined) and holding in a taxable account.

The after-tax yield on munis is very low. A taxable bond fund at 4.5% yield, taxed at 40%, leaves 2.7% after-tax. A muni at 4.5% pre-tax, tax-free, is 4.5% after-tax. So munis are better when your tax rate is very high.

Allocation: 0–20% of bond portfolio. Use only if your tax rate justifies it. In Roth or traditional IRA, munis are a poor choice (you get no tax benefit, and yields are lower).

Portfolio examples: how to use this shortlist​

Conservative Investor (Age 65, $300k bonds, Taxable Account)​

  1. $200k in BND (broad aggregate, 67% allocation)
  2. $100k in ladder of individual Treasuries (maturing 2025–2034, for spending certainty)
  3. Skip corporate, high-yield, munis. Keep it simple and safe.

Annual distributions: ~$12k from BND, ~$3–5k from matured Treasuries. Low fee (0.03% on the BND), predictable income, low volatility.

Moderate Investor (Age 50, $150k bonds, Taxable Account)​

  1. $100k in BND (67% allocation)
  2. $40k in VCIT (27% allocation, for higher yield and corporate exposure)
  3. $10k in VWOB (7% allocation, for small high-yield kicker)

Annual distributions: ~$7k from BND, ~$2k from VCIT, ~$0.7k from VWOB. Total yield ~6.5%. Fee: ~0.07% (weighted average).

If yields were to fall, the VCIT and VWOB would benefit from shorter duration (less price decline). The BND provides stability.

Aggressive Investor (Age 40, $200k bonds, Taxable Account)​

  1. $120k in BND (60% allocation, core)
  2. $50k in VCIT or LQD (25% allocation, corporates for yield)
  3. $20k in VWOB (10% allocation, high-yield)
  4. $10k in defined-maturity ETF (5% allocation, maturing 2028, for rate lock-in)

Annual distributions: ~$12k, yield ~6%. Fee: ~0.10% (weighted average). Portfolio can tolerate volatility; benefits from higher yield in rising-rate or stable environment. Vulnerable to recession (high-yield exposure).

Tax-Deferred Investor (Age 55, $300k in Traditional IRA)​

  1. $200k in BND
  2. $100k in VWOB (high-yield is fine in tax-deferred; no distribution tax drag)

No need to worry about tax efficiency. Simple, maximizes yield in a protected account. Fee: ~0.10% (weighted).

High-Income Investor (Age 50, $250k bonds, Taxable Account, $1M+ income, 50%+ tax rate)​

  1. $150k in MUB (60% allocation, tax-free)
  2. $100k in BND (40% allocation, diversification)

After-tax yield on the MUB: ~2.3%; after-tax yield on BND: ~2.7%. Combined after-tax: 2.5%. This is appropriate for this investor's tax situation. Simpler than managing munis by state.

Funds to avoid​

  1. Any bond fund with expense ratio >0.50% (unless exceptional track record)
  2. Actively managed bonds funds with underperformance (negative tracking error)
  3. Leveraged bond ETFs (e.g., PST, which uses derivatives to amplify long-duration returns; too risky for most)
  4. Inverse bond ETFs (bet against bonds; requires perfect market timing)
  5. Bonds of countries with high default risk (unless you have expertise)
  6. Perpetual bonds or perpetual preferred funds (complex, illiquid, unnecessary for most)

Rebalancing: an annual ritual​

Once you've chosen your bond funds, rebalance annually (or semi-annually). Here's how:

  1. Check current allocation: Calculate what % of your portfolio each fund now represents (market values change as prices move)
  2. Compare to target: If your target is 40% BND, 30% VCIT, 30% VWOB, but market moves pushed it to 42%, 28%, 30%, adjust
  3. Rebalance into new contributions: If you're adding new money, allocate it to the underweight positions (buying the dip)
  4. Rebalance within account: If you must sell, use the worst-performing fund (usually the one most beat up). Sell it, buy the most-lagging fund. This is a form of tax-loss harvesting

Rebalancing forces you to "buy low and sell high" mechanically, without relying on market timing intuition. It's one of the highest-return, lowest-effort practices in investing.

A final note: simplicity wins​

The easiest portfolio:

  • One fund: BND
  • Cost: 0.03%
  • Diversification: 6,000+ bonds
  • Yield: ~4.5%
  • Tax-efficiency: Acceptable

This single fund is better for most retail investors than a portfolio of 5 specialized funds with active management and high fees. Simplicity reduces behavioral errors (chasing performance, market timing) and costs (fees, taxes, trading).

Start simple. Only add complexity if you have a specific reason: higher income needs, tax optimization, or a specific allocation goal (like a Treasury ladder for retirees).

Next​

This concludes chapter 10 on bond funds and ETFs. You now have the knowledge to select, understand, and monitor bond funds. The skills build on earlier chapters' coverage of individual bonds, bond mechanics, and risk. From here, investors either deepen their bond expertise (exploring specific sectors like municipal, emerging-market, or floating-rate bonds in other chapters) or return to building a full portfolio using this foundation.