Investing in the broad based US investment grade bond market is easily done with ETFs. Here are the performance figures for the 2 largest index based bond ETFs, AGG and BND, with a money market fund for comparison.
| ETF | Expense Ratio | Current Yield | 1-year return | 3-year return | 5-year return | 10-year return |
|---|---|---|---|---|---|---|
| AGG – iShares Core US Bond | 0.03% | 3.41% | -1.45% | -3.53% | -0.18% | 1.17% |
| BND – Vanguard Total Bond Market Index | 0.03% | 3.36% | -1.36% | -3.49% | -0.11% | 1.19% |
| Fidelity Government Money Market | NA | 4.96% | 5.05% | 2.57% | 1.82% | 1.18% |
Bonds are supposed to protect a portfolio against stock market downturns, going up in value when stocks go down. In 2022, the US stock market declined by 18% while the bond market declined by 13% leading to significant overall portfolio losses. Retirement account values in the US went down an average of 20% in 2022.
Substituting money market funds for the bond portion of your portfolio has been a good idea for the past few years, but remaining in money market funds risks losing out on future gains in the bond market, which are certain to come if inflation abates and interest rates decline.
For taxable accounts we need to look at municipal bonds and the largest index based ETF in this space is the iShares National Muni Bond (MUB) ETF.
| ETF | Expense Ratio | Current Yield | 1-year return | 3-year return | 5-year return | 10-year return |
|---|---|---|---|---|---|---|
| MUB – iShares National Muni Bond | 0.05% | 2.79% | 1.96% | -0.85% | 1.28% | 2.19% |
| Fidelity Investment MM Tax Exempt – Class I | NA | 3.48% | 3.39% | 1.78% | 1.34% | 0.96% |
Again, you would have done well to be in tax exempt money market funds for the past 3 years versus tax exempt bonds, but will lose out on possible gains in the future if you remain in money markets too long.
As money market funds are yielding more than bonds, it may be advisable to wait for the Federal Reserve to signal the beginning of rate cuts before fully investing in bonds.
