A total bond market index fund can provide income and leverage during market downturns.
The latter’s ‘total’ moniker describes the high degree of diversification and bond market hedging that these funds offer. A total bond market index fund typically includes government treasuries, agency bonds, mortgage-backed securities, and investment-grade corporate bonds of all maturities.
To do this, the fund will often track the performance of a benchmark bond index, typically the Bloomberg US Aggregate Bond Index, or Agg for short. Fund managers will use either a full replication strategy or a sampling technique by buying all or most of the bonds held in the index.
“All bond market index funds tend to have low expense ratios, no entry or exit fees, no 12b-1 marketing fees, no transaction fees or commissions, low tracking errors relative to their benchmark and constant inflows, which can shrink the portfolio. revenue,” says Michael Ashley Schulman, partner and chief investment officer at Running Point Capital Advisors.
To identify the best total bond index funds currently on the market, we applied a strict set of criteria in our ranking methodology. We assessed the fund’s benchmark, level of diversification, net expense ratio, and assets under management (AUM), among other factors.
Best Total Bond Market Index Funds for 2023
Compare the best bond index funds
Why other funds were not retained
Since the funds we evaluated tracked the same benchmark – the Bloomberg US Aggregate Bond Index – the funds in this list were chosen primarily on the basis of fees, with lower fees being preferable.
All other things being equal, two funds that track an identical index will have different returns depending on their expense ratios. As with returns, the deleterious effects of high expense ratios can compound over time and cause a bond fund to lag its index.
All bond market funds with high expense ratios, 12b-1 fees or sales charges were excluded from this ranking. Given the lower yield of bonds, it is all the more important to minimize fees and keep more money compounded rather than being paid to a manager.
We have also excluded institutional-grade funds aimed at professional investors such as family offices and pension funds. These funds often require a large minimum investment, which makes them inaccessible to most retail investors.
We omitted funds that did not represent the entire bond market. For example, funds that tracked a government or corporate bond index only or a short-term or long-term bond index only were excluded. While these funds can be useful for investors with specific goals and risk tolerances, they don’t offer the broadest level of diversification. In contrast, a total bond fund encompasses most bond issuers, maturities, and credit qualities.
Finally, we have excluded all bond funds that hold international bonds. Although investors may use these funds for diversification purposes, this list focuses on all bond funds for the US market.
Our curated rankings of the best bond index funds were created by reviewing funds for several must-have metrics:
AT M : Each bond fund on this list must have accumulated an AUM of at least $1 billion. A high AUM indicates sufficient investor interest and confidence in a fund, which measures the stability and longevity of the fund. Funds with a low AUM run the risk of closing.
Spending rate: Each selected bond fund has a net expense ratio of less than 0.4%. Maintaining low expense ratios improves long-term performance and minimizes a fund’s lag relative to its benchmark.
Reference: All bond funds ranked follow the Bloomberg US Aggregate Bond Index or a variant. This index offers the most recognized exposure to a large portion of the US bond market in terms of issuer, credit quality and maturity.
Minimum investment: All funds assessed had a minimum required investment of $3,000 or less. The lower the minimum investment requirement, the more accessible a bond fund is to retail investors.
An experienced fund analyst has selected the funds above, but they may not be suitable for your portfolio. Before buying any of these funds, do plenty of research to make sure they match your financial goals and risk tolerance.
For investors looking to incorporate a fixed income allocation into their portfolios, total bond market index funds offer a one-stop shop for a good baseline. From there, investors can add bond funds that have different issuers, credit qualities, and durations to mix and match based on their investment goals and risk tolerance.
Our pick for the best total bond index fund is the Fidelity US Bond Index Fund (FXNAX), due to its competitive fees and investor-friendly features. With an expense ratio of 0.025%, no minimum investment requirements, no transaction fees, no sales charges or no 12b-1 fees, this fund is hard to beat for value and versatility.
Frequently Asked Questions (FAQ)
Total bond market index funds do not “mature” in the same way as individual bonds. While individual bonds make semi-annual interest payments until maturity when the principal investment is returned to the bondholder, total bond market index funds operate differently.
These funds hold a diversified portfolio of many bonds, with varying credit qualities and staggered maturity dates. As individual bonds in the portfolio mature, the fund manager will sell them and buy new ones to maintain the same constant target maturity and duration as the underlying index.
A bond index fund’s sources of profit can take two forms: interest income and capital appreciation. A bond index fund’s bond portfolio all earns interest, which is typically accrued and distributed to investors monthly.
Once received, investors can withdraw this income or reinvest it. The price of the underlying bonds may also rise due to bullish factors for the bond markets, such as improving credit conditions or falling interest rates.
Despite their popularity, total bond index funds have certain drawbacks that may make them unsuitable for some investors. Bond index funds do not mature like individual bond issues, which can lead to higher interest rate risk.
Total bond index funds also hold a variety of different credit qualities and maturities. This may be too broad for investors seeking targeted exposure to specific types of bonds like long-term Treasuries or short-term corporate bonds.
In addition, total bond index funds may exclude niche bonds such as inflation-protected Treasuries, tax-exempt municipal bonds, and high-yielding, lower-quality junk bonds.