The 3 Best Bond Funds to Buy for Rising Interest Rates


  • In choppy markets, these three best bond funds will help slow the losses.
  • Vanguard Short-Term Bond ETF (BSV): Investors hold more than $38 billion for a reason.
  • ProShares Equities for Rising Rates ETF (EQRR): It’s not a bond fund, but it acts like one.
  • iShares Core U.S. Aggregate Bond ETF (AGG): It will get the job done over the long haul.
Best bond funds - The 3 Best Bond Funds to Buy for Rising Interest Rates

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Finding the best bond funds to buy is a challenging exercise. That’s especially true in periods of rising interest rates.

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

[If] prevailing interest rates are increasing, older bonds become less valuable because their coupon payments are now lower than those of new bonds being offered in the market. The price of these older bonds drops 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 run, rising interest rates aren’t bad for a bond portfolio. That’s because the funds can be rolled into new bonds with higher yields when 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 to maturity. Northern Trust does a good job explaining why that’s not true. 

The point is: Fixed-income securities remain a critical way to reduce the overall risk of an investment portfolio. Further, they tend to retain their value better during rising interest rates.

Year-to-date, the Vanguard Total Bond Market ETF is down 16.2%, compared to -18.9% for the S&P 500. Meanwhile, the Vanguard Short-Term Bond ETF (NYSEARCA:BSV) is down just 7.4% through Oct. 28.

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

BSV Vanguard Short-Term Bond ETF  $74.59
EQRR ProShares Equities for Rising Rates ETF $51.30
AGG iShares Core U.S. Aggregate Bond ETF $94.98

Vanguard Short-Term Bond ETF (BSV)

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

The ETF is inexpensive at 0.04%, or 40 cents per $1,000 invested. You can’t get much lower. The fund’s total net assets are $38.8 billion, making it one of the largest ETF bond funds available on a U.S. exchange. 

The ETF tracks the performance of the Bloomberg U.S. 1–5 Year Government/Credit Float Adjusted Index. The index covers investment-grade 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. 

Approximately 67.9% of the ETF is invested in U.S. Government 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. Second-highest at 26.90% is those maturing in 2-3 years.

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

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

ProShares Equities for Rising Rates ETF (EQRR)

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The ProShares Equities for Rising Rates ETF (NASDAQ:EQRR) was launched on July 24, 2017. It was explicitly created to outperform U.S. large-cap indexes in periods of rising interest rates.

While it’s not a traditional bond fund — it tracks the performance of the Nasdaq U.S. Large Cap Equities for Rising Rates Index — the ETF’s 50 equity holdings target sectors with the highest correlations to 10-Year U.S. Treasury yields. It then selects the stocks within these sectors that historically have done well in rising-rate environments. 

Its performance has been quite good in the five years of its existence. That’s especially true since August 2020, when the 10-Year Treasury Yield hit a historically low yield of 0.51%. Between August 2020 and June 30, 2022, EQRR tripled the performance of the S&P 500. YTD, EQRR is down 0.74%, considerably better than most bond funds or the S&P 500.  

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

iShares Core U.S. Aggregate Bond ETF (AGG)

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

The ETF tracks the performance of the Bloomberg U.S. Aggregate Bond Index, which measures the entire U.S. investment-grade bond market. The ETF uses a representative sampling indexing strategy to mimic the index without holding every bond. As a result, the fund has 10,477 holdings compared to 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 U.S. Treasuries (41.56% weighting), Federal National Mortgage Association (13.18%), and Government National Mortgage Association II (5.73%).

iShares makes the argument for owning AGG:

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

the iShares AGG product brief states.

It charges just 0.03%.

On the date of publication, Will Ashworth did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the Publishing Guidelines.

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