If you are looking for low-cost investing options, both Vanguard Investments and Fidelity are good options to consider. Both firms are well known and offer low fees. They allow you to invest in many of the best bond index funds covering all the major bond types.
Learn more about your options for investing with Vanguard and Fidelity.
Total Bond Market Funds
A total bond market fund can form the core of a fixed-income portfolio. These funds track the progress of the entire bond market. This allows you to have a broad investment with a single fund.
If you are looking for just one bond fund to invest in, total bond market funds are a wise choice. Let's unpack two good choices to consider.
Vanguard Total Bond Market Index Admiral Shares (VBTLX)
VBTLX is the biggest bond fund in the world. When you own shares, you have insight to the entire sphere of the U.S. bond market. This includes more than 10,000 bonds.
The fund invests about 40% in corporate bonds and 60% in U.S. government bonds of all maturities. These include short-, intermediate-, and long-term issues.
Fidelity Total Bond (FTBFX)
FTBFX is sometimes called a "bond multivitamin." It is a core holding that offers exposure to a broad range of fixed-income assets.
Over time, FTBFX has included government and investment-grade corporate bonds, as well as high-yield investments that have a lot of promise. The fund normally invests at least 80% of assets in debt securities of all types and repurchase agreements for those securities.
Long-term bond funds invest in bonds with maturity dates of more than 10 years. They tend to perform best when interest rates are falling.
However, if you want to add a long-term bond fund to your portfolio, index funds are usually a safe choice. Vanguard and Fidelity again have some of the top funds in this category
Vanguard Long-Term Bond Index Admiral Shares (VBLAX)
This fund provides broad exposure to the long-term bond market. It has a diversified approach to bond investing and is low-cost.
VBLAX provides broad exposure to U.S. investment-grade bonds with maturities of more than 10 years. It invests about 60% of assets in corporate bonds and 40% in U.S. government bonds.
Fidelity Long-Term Treasury Bond Index (FNBGX)
This fund normally invests at least 80% of its assets in the securities that are included in the Bloomberg U.S. Long Treasury Index. FNBGX typically maintains a dollar-weighted average maturity of 10 years or more.
Short-term bonds are good choices if you are looking for low market risk with an investment period of under three years. Short-term bonds also have lower interest rate risk. Learn two solid choices for short-term bonds.
Since bond prices typically move in the opposite direction of interest rates, they are a smart choice when interest rates are rising.
Vanguard Short-Term Bond Index Admiral Shares (VBIRX)
The fund offers a low-cost, diversified approach to bond investing. It gives you broad exposure to U.S. investment-grade bonds with maturities between one and five years.
VBIRX 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 U.S. 1–5 Year Treasury Bond Index. It normally maintains a dollar-weighted average maturity of three years or less.
An index fund that invests in foreign bonds lets you diversify your bond fund holdings beyond the U.S. market. These funds are subject to interest rate risk.
Increases in interest rates could cause the bond prices in the portfolio to decrease, which would drop the fund's net asset value.
As they invest in non-U.S. bonds, these funds are also subject to risks from the country or region where they are located. They use currency-hedging strategies to protect against uncertainty in future exchange rates, so any returns reflect the performance of international bonds.
If you are looking for international bond funds, consider this one from Vanguard.
Vanguard Total International Bond Index Admiral Shares (VTABX)
This fund seeks to provide broad exposure to non-U.S. investment-grade bonds. It tracks 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 worth considering, are tax-exempt bonds and Treasury Inflation-Protected Securities (TIPS) funds.
Vanguard Tax-Exempt Bond Index Fund Admiral Shares (VTEAX)
This index fund provides broad exposure to U.S. investment-grade municipal bonds. It invests in investment-grade municipal bonds of short-, intermediate-, and long-term issues.
VTEAX has a duration profile of five to 13 years. The fund aims to provide a sustainable income that is exempt from federal personal income taxes. As a result, it is popular with investors in higher tax brackets.
Fidelity Inflation-Protected Bond Index Fund (FIPDX)
This fund normally invests at least 80% of assets in inflation-protected debt securities. These are usually found within the Bloomberg U.S. Treasury Inflation-Protected Securities (TIPS) Index (Series-L).
FIPDX holds investments in derivatives. These include 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, they are passively managed, which means the portfolio managers cannot actively buy and sell the holdings.
When interest rates are rising, some investors may be in a bad position because an index fund manager is forced to hold bonds that are falling in price more than similar funds that are actively managed.
Even professional money managers can't always predict what markets will do. Given that uncertainty, you may find that index funds are your best investment approach.
Frequently Asked Questions (FAQs)
What are bonds?
A bond is a fixed income instrument. When you buy a bond, you're loaning money to a borrower, which is usually a corporation or a government entity like a municipality, state, or the federal government. You're promised a specific rate of interest while you own the bond, and the principal must be repaid by the bond's maturity date. Bonds can be sold after they're issued, so you don't have to keep them until they mature.
What are bond funds?
A bond fund is when funds from many investors are pooled together to invest in a variety of bonds. Bond funds don't have a maturity date, and interest payments are made monthly to the investors. Bond funds typically focus on one type of bond, like corporate or government bonds.
The Balance does not provide tax or investment advice or financial services. 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.