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Home » 5 Best Bond ETFs for 2022 – Kiplinger's Personal Finance

5 Best Bond ETFs for 2022 – Kiplinger's Personal Finance

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Coming up with a list of the best bond ETFs for 2022 may at first seem like it would include only funds that can perform well in an inflationary, rising-rate environment. But this would only be partially correct.  
Unless your holding period is just a few months, allocating the entire fixed-income mix of your portfolio into funds that hold Treasury inflation-protected securities (TIPS) or ultra-short-term bonds may not be your best and only moves. Those classic plays for inflation and rising rates, respectively, can work well in 2022, but time may be limited for those ideas – especially considering the new year is already well underway.
Still, it's good to keep one eye on the best investments for today and another eye on the best investments for what's around the corner. 
For example, what will the bond market be like in 2023? Based upon history it could have an above-average year. Bonds were negative in 2021 and they started 2022 in the red. What are the chances of bonds being negative for a second or third year? Well, historically speaking, bonds have been negative two years in a row only twice in the past 90 years and never for three consecutive years.
With that in mind, here are the best bond ETFs for 2022. The names featured here will be more than just TIPs funds and ultra-short bond funds. Now can be a good time to dollar-cost average into bond funds that can perform well later in 2022 and beyond, when inflation and interest rates may not pose as much of a threat to bond prices as they did earlier in the year.
Data is as of April 10. SEC yields reflect the interest earned after deducting fund expenses for the most recent 30-day period and are a standard measure for bond and preferred-stock funds.
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Courtesy of Fidelity
2022 could go down as a year for actively managed funds and the Fidelity Total Bond ETF (FBND, $48.85) is one of the best bond ETFs in this space.
As is the case with stocks, actively managed bond funds can have an advantage over passively managed index funds in certain environments and 2022 is one of them. For example, an active fund manager can focus on areas of the bond market, such as investment-grade credit quality corporates, that will perform better than higher-quality Treasuries.
 To get a better idea of what's in the FBND portfolio, the fund had 1,902 bond holdings as of March 31. Compared to a major bond index, such as the Bloomberg Aggregate Bond Index, the Fidelity Total Bond ETF leans a bit more toward corporates, mortgage-backed securities and investment-grade credit quality. It also invests 20% of its portfolio in high-yield debt securities (also referred to as junk bonds). While this may be a bit riskier than a passively managed "total bond index" fund, it can also give FBND's performance a boost.
For evidence of the performance potential, the Fidelity Total Bond ETF beats the iShares Aggregate Bond Index (AGG) for year-to-date, one-year and three-year returns.
Learn more about FBND at the Fidelity provider site.
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Courtesy of Vanguard
For investors holding bond funds in a taxable account, the Vanguard Tax-Exempt Bond ETF (VTEB, $51.10) may prove to be one of the best bond ETFs in 2022 because it covers a "sweet spot" where yield, return and risk intersect.
In a risk-off environment, high-yield bonds may prove to be too dicey for investors. Investment-grade bonds, on the other hand, kick off yields that are attractive enough to draw buyers, even in a low-yield environment. 
What's more, the odds of default are low with the roughly 6,000+ U.S. municipal bonds held in VTEB's portfolio, considering about 75% of them are AA-rated or better. In fact, in order to be included in the portfolio, a bond must have at least an investment-grade rating. 
Also, the average duration on the Vanguard Tax-Exempt Bond's holdings is 4.6 years, which reduces downside pressure on price, compared to long-term bond funds.
So what investors get with VTEB is a low-cost, moderate-risk bond fund that can produce above-average yields without above-average risk – all while remaining tax efficient. 
Learn more about VTEB at the Vanguard provider site.
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Courtesy of iShares
The iShares TIPS Bond ETF (TIP, $121.63) could be one of the best bond ETFs to hold for 2022, especially if inflation remains at red-hot levels.
The markets move on surprises and bond prices are no exception. It's possible that the upside on the best investments for inflation could already be priced in, but a continued increase in the cost of goods and services – as many are expecting – would push returns on those investments higher.
TIP holds Treasury inflation-protected securities, or TIPS, which are bonds that are indexed to inflation via the consumer price index – a widespread measure of how quickly prices are rising. This means that the principal value of these bonds is designed to adjust for movements in inflation. Thus, when inflation is rising, the principal value of the TIPS is increasing. But if inflation begins to moderate or even trails downward in 2022, bond funds like TIPS could underperform the broader bond market indices.
Investors should also keep in mind that, although TIPS may potentially perform better during inflationary periods, they still carry interest-rate risk. So, as the Fed continues to raise rates, the market value of the underlying securities could decline, which would bring down the net asset value of a fund like TIP. This is another cautionary aspect of TIPS, where moderate inflation coupled with rising rates can still be a poor environment for these bonds.
Right now, the SEC yield is an impressive 8.3%, though the number to care about is the -0.5% real yield, which is adjusted for inflation. This means that the return is coming from the gains of these bonds as they're adjusted for inflation.
With that said, TIP can make a fine choice for investors wanting fixed bond exposure in their portfolio for diversification purposes. The  iShares TIPS Bond ETF can also be used as an alternative or complement to a core bond holding that may not perform as well in an inflationary environment.
Learn more about TIP at the iShares provider site.
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Courtesy of Vanguard
The Vanguard Ultra-Short Bond ETF (VUSB, $49.30) can be one of the best bond ETFs for 2022 for investors who want to get higher yields than money market accounts, while minimizing interest-rate risk compared to bonds with longer duration.
The average money market yield was a paltry 0.07%, according to Bankrate, while savings accounts at banks are less than that. Compare that to the 1.7% yield for VUSB and you may find a compelling reason to consider the benefits of holding an ultra-short bond ETF.
To get this yield, VUSB invests in a mix of high- and medium-quality fixed-income securities that help it maintain a dollar-weighted average maturity of up to two years. Currently, the average duration of the 750 or so bonds held in the Vanguard Ultra-Short Bond ETF is one year
A significant caveat for investors to keep in mind with ultra-short bond ETFs is that they do carry some interest-rate risk, albeit much lower than intermediate- and long-term bond funds. So, VUSB may not be an ideal alternative to cash and money market funds, but it can be a smart diversifier or supplement to the fixed-income side of a portfolio.
For reference on performance, the VUSB NAV return for the year-to-date through March 31 was 1.0%. While this return is much better than -7.9% on the broader Bloomberg Aggregate Bond Index, it's still negative, and investors should remain conscious of interest-rate risk, even on ultra-short bonds.
Learn more about VTUB at the Vanguard provider site.
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Courtesy of VanEck
Not all bond investors are seeking stable returns and average yields. For those wanting more, the VanEck Emerging Markets High Yield Bond ETF (HYEM, $19.98) is a potential option.
HYEM can be one of the best bond ETFs in 2022 for investors who are willing to take on higher levels of market risk in exchange for fat yields and the possibility of receiving bigger returns than a total U.S. bond market index may produce. This type of investor may be looking for bonds that can rebound after the Russia-Ukraine conflict calms down.
The VanEck Emerging Markets High Yield Bond ETF is made up of U.S. dollar-denominated bonds issued by emerging markets that are rated below investment grade.
To get an idea of what's in the HYEM portfolio, the top three countries by allocation weight are China at 12.3%, Brazil at 8.9% and Mexico at 7.5%. As for credit quality, 84.6% of the roughly 830 holdings are BB- or B-rated.
It's true that economic uncertainty remains in Russia. But investors willing to stick their necks out and buy small positions or dollar-cost average into emerging markets bonds could be double-rewarded with high yields and above-average returns, especially once the Russia-Ukraine conflict begins to stabilize.
Learn more about HYEM at the VanEck provider site.
Kent Thune did not hold positions in any of these bond funds as of this writing. This article is for information purposes only, thus under no circumstances does this information represent a specific recommendation to buy or sell securities.
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