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Reviewed
You know you should be investing in fixed income, but the bond market can be a challenging puzzle for many people. Choosing a total market bond index fund is an easy way to answer this riddle.
When you own shares in a total bond market fund, you get exposure to the entire bond market. You’re investing in U.S. Treasury bonds, agency bonds, corporate bonds and a variety of other fixed-income investments—and the best options charge rock-bottom fees.
Exposure to bonds is as vital for your retirement plan as it is for your taxable investment portfolio. Whether you choose to build a portfolio of just two or three funds or opt for a more complex lineup, a total bond market fund can help lower your portfolio’s overall volatility and also generate income.
Bond yields are not likely to fall any time soon. U.S. Treasury yields have risen markedly over the past few months, particularly at the longer end of the yield curve. “Looking at the available economic data, the run-up in longer-term yields appears a bit overdone. But shorter-term yields are likely to stay near current levels for some time,” says Antulio Bomfim, head of global macro in the global fixed income group of Northern Trust Asset Management. “The Fed still has a stubborn inflation problem in its hands and is unlikely to start cutting rates until core inflation is on a consistent downward trend.”
To help you cover your fixed income bases, Forbes Advisor has selected what we believe to be the seven best total bond market index funds available today. The funds below feature heavy weightings to Treasurys and other high-quality bonds, which helps minimize default risk—especially in comparison to high-yield bond funds.
| Fund | Expense Ratio |
|---|---|
|
TIAA-CREF Bond Index Advisor (TBIAX)
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0.17%
|
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Northern Bond Index (NOBOX)
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0.07%
|
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Vanguard Total Bond Market Index (VBTLX)
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0.05%
|
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Schwab U.S. Aggregate Bond Index Fund (SWAGX)
|
0.04%
|
|
Fidelity Sustainability Bond Index Fund (FNDSX)
|
0.10%
|
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Fidelity U.S. Bond Index Fund (FXNAX)
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0.03%
|
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Fidelity Flex U.S. Bond Index Fund (FIBUX)
|
0.00%
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The universe of total bond market index funds is not large. Our screen for low-costs funds with expense ratios no greater than 0.20% yielded only 12 candidates. We believe that the growing world of total market exchange-traded funds is likely crowding out the number of mutual fund options in this area.
All of the funds on our list have an expense ratio well below 0.20%. The Morningstar category average is roughly three times that amount. Remember, lower expense ratios tend to correlate to higher returns.
Five of our seven funds use the Bloomberg U.S. Aggregate Bond Index as their primary benchmark. FNDSX and VBTLX use similar indexes. Still, that does not mean that the five tracking the Bloomberg Agg, as it’s often called, are identical.
The funds do not mimic the Agg benchmark perfectly. Instead they use sampling techniques to pick and choose which bonds in the index they hold and how much of each. Each fund’s method differs from its rivals’ approach. We also included a sustainable fund that would be the best pick for ESG investors.
Turnover ratios were also distinct. As interest rates rise, higher turnover will capture newly issued, higher yielding bonds more quickly. All of these funds are suitable intermediate bond funds.
Shareholders who check under each fund’s hood will discover variations in factors such as strategy, yield and returns, depending on market conditions.
To learn more about our rating and review methodology and editorial process, check out our guide on how Forbes Advisor rates investing products.
On the surface, it can be hard to distinguish one total bond market index fund from another.
For instance, five of the funds on our list, all except VBTLX and the sustainable-investing option, primarily track the Bloomberg U.S. Aggregate Bond Index. That’s no accident, since it’s widely considered the main benchmark for the U.S. bond market, covering all major types of fixed income.
A total bond-market fund aims to provide investors with access to a cross-section of the entire investment-grade U.S. bond market in one fund. This streamlines investing and ensures broad representation of the high-credit fixed income universe.
It’s crucial for shareholders to understand that the price of an individual bond or fund will change based on movements in market interest rates. When market interest rates rise, the value of the bond or fund will drop. Older, lower-yielding bonds are replaced with new, higher-yielding bonds. And when interest rates decline, the value of a bond fund rises while the yield on new bonds fall.
For those reasons, it’s important to understand a total bond market index fund’s place in your portfolio. It’s best to own them for the long term, five years or more. That helps you weather short-term volatility.
There are at least two important considerations beyond performance that fund shareholders should keep in mind.
First, the duration of the funds in our list hovers around six years. Duration helps us understand how much the value of a fund will rise or fall with interest rates. Generally, for each 1% rise or fall in interest rates, a fund’s value will move in the opposite direction by a percentage equal to its duration.
Given the historically low interest rate environment and the recent rise in yields, you need to consider the interest rate risk associated with a total bond index fund.
Second, the Bloomberg Agg bond index and other key benchmark indexes are limited to fixed-rate securities. As a result, the index and the funds that track it do not invest in Treasury Inflation Protected Securities (TIPS), which protect investors from rising inflation.
TIPS are an important part of a well diversified portfolio—for investors wanting exposure to TIPS, they’ll need to consider other bond funds.
Index fund investing benefits from lower fees than actively managed mutual funds tend to charge. Lower costs result in better after-fee returns over the long term.
It’s also difficult for most individuals to purchase enough individual bonds to obtain a completely diversified bond portfolio. That’s where an all-in-one total bond market index fund comes in.
SP Global tracks the relative performance of actively managed funds compared to their respective benchmarks across various asset classes. Its latest report shows that actively managed funds were more likely to underperform their respective index over one-, three- and five-year periods. Morningstar has reported similar results.
