Fed officials signaled that interest rates would need to remain high “for some time” to combat stubborn inflation, which is still well above the Fed’s long-term target of 2%. For investors looking to add some stability to their portfolios, bond ETFs could be an ideal choice, as they stand out for their transparency, liquidity, and low fees.
Given this backdrop, top-performing bond ETFs Vanguard Total Bond Market ETF (BND) and iShares Core 5-10 Year USD Bond ETF (IMTB) could be solid investments this year for instant diversification and a stable income stream.
Last month, policymakers at the Federal Reserve agreed that it would be appropriate to maintain a restrictive stance “for some time” while indicating they were probably at or near the peak rate and would begin cutting rates in 2024, though the path is highly uncertain.
“Participants viewed the policy rate as likely at or near its peak for this tightening cycle,” according to the minutes of the Federal Open Market Committee meeting released Wednesday.
That said, officials “reaffirmed that it would be appropriate for policy to remain at a restrictive stance for some time until inflation was clearly moving down sustainably.” The minutes further signaled raised optimism among participants about the path of inflation, noting “clear progress.”
The consumer price index (CPI), a closely followed inflation gauge, grew 0.1% in November and was up 3.1% year-over-year. While the monthly rate indicated an increase from the flat CPI reading in October, the annual rate showed another decline after hitting 3.2% a month ago. The inflation number is still well above the Fed’s 2% target, though showing continued progress.
With the cooling inflation and the economy showing strength, Fed policymakers unanimously voted to hold the benchmark lending rate steady in a range of 5.25%-5.5% for a third straight time, a 22-year high. Members indicated they expect three quarter-percentage point cuts by the end of this year. However, the meeting summary noted high uncertainty over how or if that will happen.
Amid a high level of uncertainty around rate cuts this year, investors could invest in bond ETFs, which have introduced a much-needed degree of transparency, liquidity, and accessibility to fixed income. Bond ETFs mainly invest in fixed-income securities, including government bonds, corporate bonds, municipal bonds, and other debt instruments.
Bond ETFs provide immediate diversification, professional management, and stable income generation, making these funds quite popular among retail investors. Most of these ETFs pay dividends monthly, giving investors regular income in a short timeframe.
In light of these encouraging trends, let’s look at the fundamentals of the two best Intermediate-Term Bonds ETFs, beginning with number 2.
ETF #2: iShares Core 5-10 Year USD Bond ETF (IMTB)
IMTB offers exposure to intermediate-term U.S. dollar-denominated investment grade and high-yield bonds. It delivers a portfolio at a low cost, with targeted access to government, corporate, securitized, and emerging market bonds with maturities between five and ten years. The fund follows a vanilla market value selection and weighting schema.
IMTB tracks the Bloomberg U.S. Universal 5-10 Years Index. With $164.40 million in assets under management (AUM), its top holdings are U.S. Dollar at 6.09%, FNMA 30yr Pool#MA4597 2% 01-May-2052 with a 1.6% weighting in the fund, followed by FNMA 30yr Pool#MA4497 2.5% 01-Dec-2051 at 1.37%.
The fund has a total of 3000 holdings, with its top 50 assets comprising 57.46% of its AUM.
The fund has an expense ratio of 0.06%, lower than the category average of 0.41%. IMTB fund inflows were $4.31 million over the past month and $18.70 million over the past year.
IMTB pays an annual dividend of $1.80, which translates to a 4.16% yield at the current price level. The fund’s dividend payouts have grown at a 9.2% CAGR over the past three years and a 4.3% CAGR over the past five years. Its four-year average yield is 2.9%.
The fund has gained 1.9% over the past month to close the last trading session at $43.01. It has a beta of 0.14. The fund’s NAV was $43.02 as of January 4, 2024.
IMTB’s POWR Ratings reflect this promising outlook. The fund has an overall A rating, equating to a Strong Buy in our proprietary rating system. The POWR Ratings are calculated by considering 118 different factors, with each factor weighted to an optimal degree.
The fund has an A grade for Trade and Buy & Hold. IMTB has a B grade for Peer. Of the 50 ETFs in the A-rated Intermediate-Term Bonds ETFs group, it is ranked #30.
To access all IMTB’s POWR Ratings, click here.
ETF #1: Vanguard Total Bond Market ETF (BND)
BND seeks to track a broad, market-value-weighted index of U.S. dollar-denominated, investment-grade, taxable, fixed-income securities with maturities of at least one year. It delivers a massive portfolio at a low cost, with holdings in treasuries, government-rated and corporate securities, MBS, and agency bonds. The fund provides moderate current income with high credit quality.
BND tracks the Bloomberg U.S. Aggregate – Float Adjusted Index. The fund has an AUM of $104.56 billion. It currently has a total of 18,000 holdings.
The fund’s top holdings include U.S. Dollar with a 1% weighting, United States Treasury Notes 1.875% 15-FEB-2032 at 0.49%, followed by United States Treasury Notes 1.875% 15-FEB-2032 with a 0.49% weighting and United States Treasury Notes 1.375% 15-NOV-2031 at 0.48%.
BND has an expense ratio of 0.03%, lower than the category average of 0.41%. Over the past month, its fund inflows came in at $1.67 billion and $4.75 billion over the past three months. BND fund flows were $17.49 billion over the past year. Also, the ETF has a beta of 0.14.
The fund pays an annual dividend of $2.27, translating to a 3.10% yield at the prevailing price level. Its dividend payouts have grown at a 2.7% CAGR over the past three years. The fund’s four-year average yield is 2.51%.
BND has gained 1.9% over the past month to close the last trading session at $72.97. It has a NAV of $72.90 as of January 4, 2024.
BND’s solid fundamentals are reflected in its POWR Ratings. The fund has an overall rating of A, which translates to a Strong Buy in our proprietary rating system.
The fund has an A grade for Trade and Buy & Hold. BND tops the list of 50 ETFs in the same group.
Click here to see all the BND ratings.
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BND shares fell $0.08 (-0.11%) in premarket trading Friday. Year-to-date, BND has declined -0.80%, versus a -1.69% rise in the benchmark S&P 500 index during the same period.
About the Author: Mangeet Kaur Bouns
Mangeet’s keen interest in the stock market led her to become an investment researcher and financial journalist. Using her fundamental approach to analyzing stocks, Mangeet’s looks to help retail investors understand the underlying factors before making investment decisions.
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