Bonds are loans to corporations, municipalities, or other entities. Investors loan their money to the entity and later receive interest on their principal. Bond ETFs, unlike stock ETFs, are fixed-income funds that let investors earn income from interest payments. Many bond ETFs that 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, the U.S. central bank. The Fed is taking steps to contain inflation just as investors also are getting nervous about the resurgence of the Omicron variant. The central bank in March plans to end its pandemic-era bond-buying program in 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 Federal Reserve’s estimated peak.
- The bonds market, as measured by the Bloomberg U.S. Aggregate Bond Index, has underperformed the broader market.
- The ETFs with the best one-year trailing total return are XMPT, FMHI, and ANGL.
- The top holdings of these ETFs are Nuveen AMT-Free Municipal Credit Income Fund of Benef Interest (NVG), Buckeye Ohio Tobacco Settlement 5% due June 1, 2055, and Kraft Heinz Foods Co. 4.375% corporate bond due June 01, 2046.
There are 315 bond ETFs that trade in the U.S., excluding inverse ETFs, leveraged ETFs, and ETFs with fewer than $50 million in AUM. The bond market return, as measured by the Bloomberg US 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 EFT (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%
- 3-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 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 may generate yields higher than most other fixed income investments. The fund’s top three holdings are three different bond funds: Nuveen AMT-Free Municipal Credit Income Fund of Benef Interest (NVG), Nuveen Quality Municipal Income Fund of Benef Interest (NAD), and Nuveen AMT-Free Quality Municipal Income Fund of Benef Interest (NEA).
First Trust Municipal High Income ETF (FMHI)
- Performance Over One-Year: 7.9%
- Expense Ratio: 0.55%
- Annual Dividend Yield: 2.91%
- 3-Month Average Daily Volume: 47,814
- Assets Under Management: $378.9 million
- Inception Date: Nov. 01, 2017
- Issuer: First Trust
The First Trust Municipal 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 between 15 and 19.99 years. The fund’s top three holdings are: Buckeye Ohio Tobacco Settlement 5% due June 1, 2055; Black Desert PUB Infrastructure Dist UTAH 4% due March 01, 2051; and Canyon Pines Metropolitan District Co SPL IMPT Dist 1 3.75% due Dec. 01, 2040.
- Performance Over One-Year: 7.0%
- Expense Ratio: 0.35%
- Annual Dividend Yield: 4.43%
- 3-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, United Kingdom, Germany, France, and Canada and elsewhere. Top holdings include Kraft Heinz Foods Co. (KHC) 4.375% corporate bonds due June 01, 2046, Sprint Capital Corp. 6.875% corporate bonds due Nov. 15, 2028, and the Sprint Capital Corp. 8.75% corporate bonds due March 15, 2032.
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