The 3 best bond funds to buy for rising interest rates


Finding the best bond funds to buy is a difficult exercise. This is especially true in times of rising interest rates.

Pimco, one of the country’s leading bond investors, explains why interest rates affect bonds:

[If] prevailing interest rates rise, older bonds lose value as their coupon payments are now lower than new bonds offered in the market. These older bonds are falling in price and they are described as trading at a discount,

states the Pimco primer on bond performance and interest rates.

The company says that over the long term, rising interest rates are not bad for a bond portfolio. This is because the funds can be transferred into new bonds with higher yields when the bonds mature.

Some do-it-yourself investors believe it’s safer to own individual bonds than bond funds because it allows them to avoid interest rate risk by holding them to maturity. Northern Trust is doing a good job explaining why is that not true.

The point is this: fixed-income securities remain an essential means of reducing the overall risk of an investment portfolio. They also tend to hold their value better when interest rates rise.

Since the beginning of the year, the Vanguard Total Bond Market ETF was down 16.2%, compared to -18.9% for the S&P500. During this time, the Vanguard Short Term Bond ETF (NYSEARC:BSV) is down just 7.4% through October 28.

With that in mind, here are the three best bond funds to buy as interest rates continue to rise.

BSV Vanguard Short Term Bond ETF $74.59
EQRR ProShares Actions for Rising ETF Rates $51.30
AGG iShares Core US Aggregate Bond ETF $94.98

Vanguard Short Term Bond ETF (BSV)

Source: Casimiro PT /

As I mentioned in the introduction, the Vanguard Short-Term Bond ETF has done reasonably well in 2022, down less than 8%.

ETF is cheap to 0.04%, or 40 cents per $1,000 invested. You can’t go much lower. The fund’s total net assets are $38.8 billion, making it one of the largest bond ETFs available on a US exchange.

The ETF tracks the performance of the Bloomberg US 1–5 Year Government/Credit Float Adjusted Index. The index covers high quality bonds with a dollar-weighted average maturity of 1 to 5 years.

BSV holds 2,624 bonds. The average holding has a yield to maturity of 4.5%, with an average effective maturity of 2.9 years.

Around 67.9% of the ETF is invested in US Treasuries. The second and third largest weightings are A-rated corporate bonds at 12.90% and BBB-rated corporate bonds at 12.30%.

Regarding effective maturity, the largest weighting is 29.30% for bonds maturing in 1-2 years. In second place, at 26.90%, are those maturing in 2-3 years.

In existence since April 2007, the ETF’s average annual return through September 30 is 2.08%.

You won’t get rich by owning BSV, but you’ll probably sleep better at night.

ProShares Actions for Rising Rates ETF (EQRR)

a bag of money and several different asset classes as blocks balanced on a weighing scale

Credit: William Potter/Shutterstock

The ProShares Actions for Rising ETF Rates (NASDAQ:EQRR) has been spear on July 24, 2017. It was explicitly created to outperform US large-cap indices during periods of rising interest rates.

Although it is not a traditional bond fund – it tracks the performance of the Nasdaq US Large Cap Equities for Rising Rates Index – the ETF’s 50 stocks target sectors with the highest correlations with 10-year US Treasury yields. It then selects stocks from those sectors that have historically performed well in rising rate environments.

Its performance has been quite good over the five years of its existence. This is all the more true since August 2020, when the 10-year Treasury yield hit an all-time low of 0.51%. Between August 2020 and June 30, 2022, EQRR tripled the performance of the S&P 500. Year-to-date, EQRR is down 0.74%, much better than most bond funds or the S&P 500.

The ETF isn’t large, with just $66 million in assets, but it’s a unique fund that’s held up pretty well in 2022. I’d consider it a complement to any fixed income portion of your portfolio .

iShares Core US Aggregate Bond ETF (AGG)

Sign iShares by Blackrock

Source: various photographs /

In May 2021, I argued that the iShares Core US Aggregate Bond ETF (NYSEARC:AGG) and six other big ETFs deserved even more of your money. At the time, it was trading at $115. Today, it is down 17.4% to $95. The S&P 500 is down 7.9% or less than half.

The ETF tracks performance the Bloomberg US Aggregate Bond Index, which measures the entire US investment grade bond market. The ETF uses a representative sampling indexing strategy to mimic the index without holding all the bonds. As a result, the fund has 10,477 farms against 12,364 for the index.

The average holding has an average yield to maturity of 4.82% and a weighted average maturity of 8.6 years. The ETF’s top three holdings are US Treasuries (41.56% weighting), Federal National Mortgage Association (13.18%) and Government National Mortgage Association II (5.73%).

iShares makes the dispute to own AGG:

Investment grade bonds have outperformed when there is a flight to quality, especially during periods of equity market volatility. The five biggest declines in the S&P 500 The index since the global financial crisis has all seen AGG post better returns,

indicates the iShares AGG product sheet.

It only charges 0.03%.

As of the date of publication, Will Ashworth had no position (directly or indirectly) in the securities mentioned in this article. The opinions expressed in this article are those of the author, subject to Publication guidelines.

Will Ashworth has been writing about investing full time since 2008. Publications where he has appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger and many others in the US and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia.


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