Most Investors Pick The Wrong Bond Etf. I'd Buy Bnd …

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Why higher bond yields can be bad for bond investors

Just stocks, the price of bonds is driven by the latest moves in the economy, inflation, and financial markets. No one knows what will happen next with all the risk factors that can make bonds vulnerable to a sell-off.

It’s possible for bond investors to lose money if the price of their bonds goes down more than their yields pay in income. Bonds can also be risky based on the specific types of bonds you buy. Corporate bonds and some international government bonds have a risk of default — companies sometimes struggle to pay their bills or even go out of business. Some countries (especially emerging markets) have a risk of defaulting on their national debt. When a default happens, their bondholders lose money.

Because of these risks, high-yield bonds or “junk bonds” pay better yields than U.S. government bonds. U.S. Treasury bonds offer a risk-free rate of return, but even those “safe” government bonds can deliver a negative total return based on the bond’s duration and changes in interest rates.

Does that all sound way too complicated? If so, you might want to stop worrying about how to pick the right bonds. Choosing the “wrong bond ETF” can bring extra unnecessary risks into your investment portfolio. I buy BND to avoid these complications.

What’s the best bond ETF? BND: Thousands of bonds, 0.03% expense ratio.

The Vanguard Total Bond Market ETF offers exposure to 11,421 bonds with a broad mix of bond issuers and durations. About 68.9% of the fund’s holdings are in U.S. government bonds, and the rest of the fund is holding investment-grade corporate debt with credit ratings of BBB or higher. It charges an ultra-low expense ratio of 0.03%.

BND holds a broad mix of bond durations. This includes short-term bonds with maturities of a few years or less, and long-term bonds that mature in 20 years or more. But about 79% of the fund’s holdings are in bonds with maturity dates of less than 10 years. The fund’s average effective maturity is 8.2 years, making BND a “medium duration” bond fund.

For that reason, the Vanguard Total Bond Market ETF tends to pay a lower yield than longer-term Treasury bonds but is also less vulnerable to the risk of rising long-term interest rates. As of this writing, BND was paying a 30-day SEC yield of 4.98%.

The past few years of rising interest rates have been a drag on returns for BND. This fund has delivered average annual total returns of -0.31% for the past five years and 1.83% for the past year.

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NASDAQ: BND

Vanguard Total Bond Market ETF

Today’s Change

(0.23%) $0.16

Current Price

$70.25

Key Data Points

AUM

$399B

Dividend Yield

4.52%

Expense Ratio

0.03%

Why I’m buying BND even if interest rates go up

Here’s how I think about buying bonds: Buying bonds when yields are high (and prices are low) is “buying the dip.” In the same way that buying stocks when stock prices are down is often a good move for long-term investors, I’m going to keep buying bonds on a regular basis, even if bond yields keep creeping up for the rest of 2026 and 2027.

In the long run, no one knows what’s going to happen next with interest rates or bond prices. It’s possible that 10-year Treasury yields and longer-term bond yields are going to keep pushing higher. Are higher bond yields a warning sign of a financial crisis or a stock market crash? Is the U.S. government on the verge of a national debt crisis?

Frankly, at this moment, I doubt it. Higher bond yields are not always a warning sign of worst-case scenarios. It’s possible that higher bond yields are a healthy sign of a growing economy and lots of competition in the bond market for borrowers among corporate and government debt issuers.

Higher bond yields are a good thing for bond investors who buy bonds today. Investors deserve to get paid for the risks they take by locking up their money in long-term bonds. After so many years when yields were near zero, we might just be getting back to normal. I’m going to keep buying BND as part of my long-term investment plan.

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About the Author

Ben Gran is a contributing analyst at The Motley Fool, covering publicly traded companies in consumer goods, technology, transportation, industrials, materials, and energy. He is a longtime freelance finance writer with 15+ years of experience writing for publications Forbes Advisor, Motley Fool Money, and Business Insider, and corporate websites of Prudential and regional banks. Ben also ghostwrites books and bylines for CEOs and other business thought leaders. He earned his B.A. in History from Rice University. Ben is an avid international traveler and has visited 12 countries (and counting).

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