Bonds are loans to corporations, municipalities, or other entities. Investors loan their money to the entity and later receive interest on their principal. Bond exchange-traded funds (ETFs), unlike stock ETFs, are fixed-income funds that let investors earn income from interest payments.
Many bond ETFs focus on municipal, corporate, government, and international debt, while others track benchmarks such as the Bloomberg U.S. Aggregate Bond Index. Investors may also purchase bond ETFs that have specific ranges of maturity dates.
The bond market’s outlook is changing due to plans by the Federal Reserve (Fed), the U.S. central bank. The Fed is taking steps to contain inflation just as investors also are getting nervous about the resurgence of COVID-19 due to the Omicron variant. In March 2022, the central bank plans to end its pandemic-era bond-buying program as the economy nears full employment. While tapering bond purchases gives the Fed greater flexibility to raise interest rates, it also comes with risks. Bond market investors worry that the program may leave short-term interest rates below the Fed’s estimated peak.
- The bonds market, as measured by the Bloomberg U.S. Aggregate Bond Index, has underperformed the broader market.
- The bond exchange-traded funds (ETFs) with the best one-year trailing total return are XMPT, FMHI, and ANGL.
- The top holdings of these ETFs are, respectively, the Nuveen AMT-Free Municipal Credit Income Fund of Benef Interest (NVG), the Buckeye Ohio Tobacco Settlement 5% due on June 1, 2055, and the Kraft Heinz Foods Co. 4.375% corporate bonds due on June 1, 2046.
There are 315 bond ETFs that trade in the United States, excluding inverse ETFs, leveraged ETFs, and ETFs with fewer than $50 million in assets under management (AUM). The bond market return, as measured by the Bloomberg U.S. Aggregate Bond Index, has underperformed the broader market over the past 12 months, with a total return of -3.9% compared to the S&P 500’s total return of 28.0% as of Dec. 16, 2021. The best performing bond ETF, based on performance over the past year, is the VanEck CEF Muni Income ETF (XMPT).
Below, we’ll look at the top three bond ETFs to consider for 2022. All numbers below are as of Dec. 19, 2021.
- Performance Over One-Year: 9.2%
- Expense Ratio: 2.32%
- Annual Dividend Yield: 4.13%
- Three-Month Average Daily Volume: 41,738
- Assets Under Management: $214.6 million
- Inception Date: July 12, 2011
- Issuer: VanEck
XMPT enables investors to access the municipal bond market by replicating as closely as possible the price and performance of the S-Network Municipal Bond Closed-End Fund Index. The benchmark tracks the performance of the U.S.-listed closed-end funds that buy securities in the U.S.-dollar-denominated tax-exempt market. Despite investing in closed-end funds, its approach provides great diversity of exposure in fixed-income securities of varying durations. The ETF offers the potential of a high level of tax-exempt income, and it may generate yields higher than most other fixed-income investments.
The fund’s top three holdings are three different bond funds: the Nuveen AMT-Free Municipal Credit Income Fund of Benef Interest (NVG), the Nuveen Quality Municipal Income Fund of Benef Interest (NAD), and the Nuveen AMT-Free Quality Municipal Income Fund of Benef Interest (NEA).
- Performance Over One-Year: 7.9%
- Expense Ratio: 0.55%
- Annual Dividend Yield: 2.91%
- Three-Month Average Daily Volume: 47,814
- Assets Under Management: $378.9 million
- Inception Date: Nov. 1, 2017
- Issuer: First Trust
The First Trust Municipal High Income ETF is an actively managed fund that primarily aims to provide federally tax-exempt income to investors. The fund keeps a minimum of 80% of its net assets in municipal debt securities whose interest proceeds are exempt from regular federal income taxes. FMHI’s largest exposure is in debt securities that have a maturity of 15 to 19.99 years.
The fund’s top three holdings are Buckeye Ohio Tobacco Settlement 5% due on June 1, 2055; Black Desert PUB Infrastructure Dist UTAH 4% due on March 1, 2051; and Canyon Pines Metropolitan District Co SPL IMPT Dist 1 3.75% due on Dec. 1, 2040.
- Performance Over One-Year: 7.0%
- Expense Ratio: 0.35%
- Annual Dividend Yield: 4.43%
- Three-Month Average Daily Volume: 1,701,880
- Assets Under Management: $5.2 billion
- Inception Date: April 10, 2012
- Issuer: VanEck
The VanEck Fallen Angel High Yield Bond ETF tracks the price and performance of the ICE U.S. Fallen Angel High Yield 10% Constrained Index. The fund comprises below-investment-grade corporate bonds that were originally issued as investment-grade corporate bonds. At least 80% of ANGL’s assets are invested in securities that make up the fund’s benchmark index.
The fund provides fixed-income securities exposure to debt in the United States, Italy, the United Kingdom, Germany, France, Canada, and elsewhere. Top holdings include Kraft Heinz Foods Co. (KHC) 4.375% corporate bonds due on June 1, 2046; Sprint Capital Corp. 6.875% corporate bonds due on Nov. 15, 2028; and Sprint Capital 8.75% corporate bonds due on March 15, 2032.
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