The Best Bond Index Funds to Buy From Vanguard and Fidelity

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When investors think of the best index funds, Vanguard Investments usually comes to mind. The investing community considers the firm to be the leader of low-cost investing, and many of the best bond index funds are in the Vanguard lineup. Fidelity Investments, one of Vanguard's biggest competitors, also offers a handful of excellent bond fund choices that include different categories covering all of the major bond types.

Total Bond Market

If you're looking for one good bond fund to hold, or need a solid core holding for a fixed-income portfolio, total bond market funds are a wise choice. Here are two good choices to consider:

Vanguard Total Bond Market Index (VBMFX)

The biggest bond fund in the world, VBMFX, offers shareholders exposure to the entire universe of the U.S. bond market, which includes more than 8,000 bonds. The fund invests 30% in corporate bonds and 70% in U.S. government bonds of all maturities: short-, intermediate-, and long-term issues.

Fidelity Total Bond (FTBFX)

Termed a "bond multivitamin," this is a core holding that offers exposure to a broad range of fixed-income assets. Over time, these have included broad exposure to government and investment-grade corporate bonds and opportunistic high-yield investments. The fund normally invests at least 80% of assets in debt securities of all types and repurchase agreements for those securities.

Long-Term Bonds

Long-term bond funds tend to perform best when interest rates are falling, but if you want to add a long-term bond fund to your portfolio, index funds can be a good choice. Vanguard and Fidelity again have some of the top funds in this category:

Vanguard Long-Term Bond Index (VBLTX)

Consider this fund for broad exposure to the long-term bond market, as it has a diversified approach to bond investing and is low-cost. It provides broad exposure to U.S. investment-grade bonds with maturities of more than 10 years and invests about 30% of assets in corporate bonds and 70% in U.S. government bonds.

Fidelity Long-Term Treasury Bond Index (FNBGX)

This fund normally invests at least 80% of assets in securities included in the Bloomberg Barclays U.S. Long Treasury Index. It typically maintains a dollar-weighted average maturity of 10 years or more.

Short-Term Bonds

Short-term bonds are good choices for investors looking for low relative market risk with investment periods of under three years. Short-term bonds also have lower interest rate risk, which means they can be smart investing ideas when interest rates are rising because bond prices typically move in the opposite direction of interest rates. Here are two solid choices:

Vanguard Short-Term Bond Index (VBISX)

The fund offers a low-cost, diversified approach to bond investing, with broad exposure to U.S. investment-grade bonds with maturities between 1–5 years. It invests about 30% of its assets in corporate bonds and 70% in U.S. government bonds within that maturity range.

Fidelity Short-Term Treasury Bond Index (FUMBX)

This fund typically invests at least 80% of its assets in securities included in the Bloomberg Barclays U.S. 1–5 Year Treasury Bond Index. It normally maintains a dollar-weighted average maturity of three years or less.

International Bonds

To diversify your bond fund holdings beyond the U.S., use an index fund that invests in foreign bonds. As is typical, these funds are subject to interest rate risk. Increases in interest rates could cause the bond prices in the portfolio to decrease and drop the fund's net asset value. 

Because they invest in non-U.S. bonds, the funds are also subject to country and regional risks. They utilize currency hedging strategies to protect against uncertainty in future exchange rates, so investment returns would reflect the underlying performance of international bonds. Consider the following fund from Vanguard:

Vanguard Total International Bond Index (VTIBX)

This fund seeks to provide broad exposure to non-U.S. investment-grade bonds and tracks the performance of an index that includes international government, agency, and corporate securities. The bonds are mostly from developed countries, but some emerging market countries are included.

Alternative Bond Types

There are several niche categories of bonds. A few that are available as index funds and worthy of investor attention are tax-exempt bonds and Treasury Inflation-Protected Securities (TIPS) funds.

Vanguard Tax-Exempt Bond Index (VTEBX)

This index fund provides broad exposure to U.S. investment-grade municipal bonds. It invests in investment-grade municipal bonds of all maturities—short-, intermediate-, and long-term issues—and has a duration profile of 5–8 years. The fund aims to provide a sustainable level of current income that is exempt from federal personal income taxes, so investors in higher tax brackets tend to find it attractive.

Fidelity Inflation-Protected Bond Index Fund (FIPDX)

This fund normally invests at least 80% of assets in inflation-protected debt securities within the Bloomberg Barclays U.S. Treasury Inflation-Protected Securities (TIPS) Index (Series-L). The fund holds investments in derivatives, such as swaps and futures contracts, as well as forward-settling securities that adjust the fund's risk exposure.

A Word of Caution Before Buying

Bond index funds are useful diversification tools and can beat actively managed funds in the long run. However, since they're passively managed, the portfolio managers are not able to buy and sell the holdings at their discretion. When interest rates are rising, some investors may be in a bad position because an index fund manager is forced to hold bonds that may be falling in price more than similar funds that are actively managed. Even professional money managers can't accurately and consistently predict what markets will do in advance. Given that uncertainty, most investors find index funds their best investment approach.

The Balance does not provide tax, investment, or financial services and advice. The information is being presented without consideration of the investment objectives, risk tolerance, or financial circumstances of any specific investor and might not be suitable for all investors. Past performance is not indicative of future results. Investing involves risk, including the possible loss of principal.