The Bond ETFs That Belong in Your Portfolio, and Which Ones Require Extra Caution

Key Points:

• The largest bond ETFs favored by retail investors are ultrashort-bond and intermediate core-bond ETFs, with Vanguard Total Bond Market ETF (BND) and iShares Core U.S. Aggregate Bond ETF (AGG) holding about $300 billion combined, reflecting a preference for relatively safe, short- to medium-term bonds.
• Ultrashort bond ETFs like iShares 0-3 Month Treasury Bond ETF (SGOV) and Vanguard 0-3 Month Treasury Bill ETF (VBIL) offer near-riskless capital preservation with yields over 3.5%, while slightly riskier options like JPMorgan Ultra-Short Income ETF (JPST) provide higher yields by including securitized and corporate bonds.
• Intermediate core and core-plus bond ETFs balance risk and income, with funds like Fidelity Total Bond ETF (FBND) and JPMorgan Core Plus Bond ETF (JCPB) offering higher yields through active management and credit risk exposure, suitable for investors who can tolerate periodic drawdowns.
• Municipal bond ETFs such as Vanguard Tax-Exempt Bond ETF (VTEB) and iShares National Muni Bond ETF (MUB) provide federally tax-exempt income, making them attractive for investors in higher tax brackets using taxable accounts.
• Investors should exercise caution with long-term bond ETFs and high-yield bond ETFs due to their higher volatility and sensitivity to economic cycles; long-term bond funds have experienced significant drawdowns recently, and high-yield ETFs carry elevated credit risk, though small allocations within diversified portfolios may be appropriate.