Forbes Advisor Staff,  Editor

Updated: Aug 1, 2021, 10:18pm

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Bonds can be a puzzle for some investors. You already know that you should be investing in fixed income, but understanding the ins and outs of the bond market may be challenging. Investing in a total market bond index fund gives you an easy way to solve the puzzle.

When you buy shares in a U.S. total bond market fund, you are getting exposure to the entire bond market. With one fund, you’re investing in U.S. treasury bonds, agency bonds, corporate bonds and a variety of other fixed income investments—and the best options cost 15 basis points or less.

Exposure to bonds is a key component of your retirement investing plan as well as your taxable investment portfolio. Whether you choose to build a 2-fund or a 3-fund portfolio, or opt for a more complex arrangement, a total bond market fund can help lower your portfolio’s overall volatility.

To help you choose the right option, Forbes Advisor has surveyed the market and selected seven of the best U.S. total bond index funds available today.

Best U.S. Total Bond Market Index Funds of August 2021


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Fidelity U.S. Bond Index Fund — FXNAX

Fidelity

Trailing 12-Month Yield

5-Year Return

Expense Ratio

Fidelity

Trailing 12-Month Yield

5-Year Return

Expense Ratio

Why We Picked It

Total U.S. bond index funds typically track the Bloomberg Barclays U.S. Aggregate Bond Index. That’s true of most of the bond funds that made our list, including FXNAX. The index measures the investment grade, U.S. dollar-denominated, fixed-rate taxable bond market. Bonds in the index include Treasury and other government-related bonds and investment-grade corporate bonds.

The fund does not require a minimum investment and charges a rock-bottom fee of just 2.5 basis points. It has a 5-year return of 3.55% and a yield over the past year of 2.05%

  • Tracking Index: Bloomberg Barclays U.S. Aggregate Bond Index
  • Minimum Investment: None
  • Duration: 5.78 years
  • Inception: 1990
  • Holdings: 2,280

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Vanguard Total Bond Market Index Fund — VBTLX

Vanguard

Trailing 12-Month Yield

5-Year Return

Expense Ratio

Vanguard

Trailing 12-Month Yield

5-Year Return

Expense Ratio

Why We Picked It

In addition to its U.S. Aggregate Bond Index, Bloomberg publishes sub-indices that make important changes to its flagship index. These sub-indices include a float adjusted index, which Vanguard uses for its total bond index fund. Bloomberg added this sub-index in 2009 to respond to the Federal Reserve’s bond buying spree. The float adjusted benchmark excludes securities held by the Fed. Because the Fed buys largely government bonds, this sub-index has a slightly lower allocation to government bonds and slightly higher allocation of corporate bonds than the flagship index.

The fund does require a minimum investment of $3,000, but charges a low fee of five basis points. Of note, the fund holds one of the lowest amounts of cash (just 0.17% according to Morningstar) of the funds on our list, suggesting that its portfolio more closely tracks the index.

  • Tracking Index: Bloomberg Barclays U.S. Aggregate Float Adjusted Bond Index
  • Minimum Investment: $3,000
  • Duration: 6.6 years
  • Inception: 2001
  • Holdings: 10,025

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Fidelity Total Bond Fund — FTBFX

Fidelity

Trailing 12-Month Yield

5-Year Return

Expense Ratio

Fidelity

Trailing 12-Month Yield

5-Year Return

Expense Ratio

Why We Picked It

Bloomberg Barclays bond indices include the U.S. Universal Index, which this fund uses as a guide to its portfolio construction. The U.S. Universal Index adds high yield bonds and emerging markets debt. As such, it increases the credit risk (i.e., risk of default) of the bond portfolio, along with the expected return.

The result is a bond index fund with the highest five-year return on our list. It’s also the most expensive fund on our list, at 45 basis points. While the fund invests primarily in U.S. bonds, the inclusion of emerging market debt means that about 19% of the fund invests in debt issued by foreign entities. It also held nearly 7% in cash at the end of 2020.

  • Tracking Index: Bloomberg Barclays U.S. Universal Bond Index
  • Minimum Investment: None
  • Duration: 5.72 years
  • Inception: 2002
  • Holdings: 2,923

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Schwab U.S. Aggregate Bond Index Fund — SWAGX

Schwab

Trailing 12-Month Yield

5-Year Return

Expense Ratio

Schwab

Trailing 12-Month Yield

5-Year Return

Expense Ratio

Why We Picked It

The Schwab U.S. Aggregate Bond Index Fund tracks the Bloomberg Barclays U.S. Aggregate Index at a low, low cost of just four basis points. It requires no minimum investment and has a trailing twelve month yield of 3.32%, the highest on our list of those funds that track this benchmark index. With an inception date of 2017, a five-year return is not presently available.

The fund aims to invest at least 90% of its net assets in securities included in its benchmark index, and the remaining 10% of assets in highly liquid securities not included in its index, including short-term government or agency debt, other funds and possibly futures contracts.

  • Tracking Index: Bloomberg Barclays US Aggregate Bond Index
  • Minimum Investment: None
  • Duration: 6.3 years
  • Inception: 2017
  • Holdings: 7,675

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BNY Mellon Bond Market Index Fund — DBIRX

BNY

Trailing 12-Month Yield

5-Year Return

Expense Ratio

BNY

Trailing 12-Month Yield

5-Year Return

Expense Ratio

Why We Picked It

The BNY Mellon Bond Market Index Fund aims to match the total return of the Bloomberg Barclays U.S. Aggregate Index. It allocates at least 80% of its net assets in the holdings of the index, and invests approximately 20% of its assets in various short-term, fixed-income securities and money market funds to maintain liquidity.

The fund requires a $1,000 minimum investment and charges an expense ratio of 15 basis points. With over $1.2 billion in total net assets and 2,850 holdings, the fund presently holds a significant amount of cash, weighing in at over 9.6% as of the end of 2020, according to Morningstar.

  • Tracking Index: Bloomberg Barclays U.S. Aggregate Bond Index
  • Minimum Investment: $1,000
  • Duration: 6.05 years
  • Inception: 1993
  • Holdings: 2,850

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Northern Trust Bond Index — NOBOX

Northern

Trailing 12-Month Yield

5-Year Return

Expense Ratio

Northern

Trailing 12-Month Yield

5-Year Return

Expense Ratio

Why We Picked It

The Northern Trust Bond Index Fund charges a fee of 15 basis points. It has a 5-year performance of 3.41% and a trailing 12-month yield of 2.31%. It’s the only fund in our list that holds no cash, according to Morningstar.

  • Tracking Index: Bloomberg Barclays U.S. Aggregate Bond Index
  • Minimum Investment: $2,500
  • Expense Ratio: 0.15%
  • Duration: 6.28 years
  • Inception: 2007
  • Holdings: 2,725

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T. Rowe Price QM U.S. Bond Index Fund — PBDIX

T.

Trailing 12-Month Yield

5-Year Return

Expense Ratio

T.

Trailing 12-Month Yield

5-Year Return

Expense Ratio

Why We Picked It

The T. Rowe Price QM U.S. Bond Index Fund has the highest five-year return of the funds on our list that track the Bloomberg Barclays U.S. Aggregate Bond Index. The fund’s prospectus notes that “incremental returns above the index could result in a greater chance that the fund’s returns will deviate from the returns of its benchmark when compared with a fund that strictly follows a passive indexing strategy.” This in part explains both its slightly better performance and its higher expense ratio of 25 basis points.

  • Tracking Index: Bloomberg Barclays U.S. Aggregate Bond Index
  • Minimum Investment: $2,500
  • Duration: 6.01 years
  • Inception: 2000
  • Holdings: 1,147

Methodology

Our methodology focused on over two dozen index funds that seek to track the broad U.S. bond market. We excluded from consideration funds that didn’t cover the entire market, such as speciality bond funds invested chiefly or exclusively in Treasury Inflation-Protected Securities (TIPS), high-yield corporate bonds or municipal bonds. We also excluded actively managed bond funds.

In evaluating broad market bond index funds, we considered several factors. Using data provided by Morningstar and fund management companies, we evaluated each candidate fund’s five-year returns, expense ratio and tracked index. Many broad market bond funds track the Bloomberg Barclays U.S. Aggregate Bond Index, and we felt it was important to include funds that track other indexes, so long as they met the criteria mentioned above.

The difference in these variations is particularly important with the Bloomberg Barclays U.S. Universal Bond Index. As highlighted above in the Fidelity Total Bond Fund, the fund’s five-year return is significantly higher than the other options in our list, in large part because it takes on more credit risk.

Finally, we considered each fund’s yield over the last 12 months, the so-called trailing 12-month yield, or TTM. A fund’s TTM yield gives investors a glimpse into the current bond market, something that a five- or ten-year return measure can obscure.


How Do Total Bond Market Index Funds Work?

On the surface, it can be hard to distinguish one total bond market index fund from another. For instance, most of the funds on our list track the Bloomberg Barclays US Aggregate Bond Index. That’s no accident, since it’s considered the main benchmark index for the U.S. bond market, covering all major types of fixed income.

On closer examination, important differences emerge. First and foremost are costs—choosing an index fund with the lowest possible fees ensures that more money stays in your pocket over the life of an investment. The funds we list here range in price from 2.5 basis points to 45 basis points.

Then there are total bond market funds that track other indexes, like the U.S. Universal Index. This alternative index adds high-yield and emerging markets bonds to the mix, offering higher returns in exchange for more cost and somewhat higher risk.


Should You Invest in a Total Bond Market Index Fund?

Index fund investing benefits from lower fees than buying actively managed mutual funds. Lower costs result in better after-fee returns over the long term. That’s true with fixed income investments as well as equities.

SP Global tracks the relative performance of actively managed funds compared to their respective benchmark across a number of asset classes. Its latest report shows that actively managed funds were more likely to underperform their respective index over one-, three- and five-year periods. Morningstar has reported similar results.

There are at least two important considerations beyond performance that investors should keep in mind. First, the duration of the funds in our list hover around six years. Duration helps us understand how much the value of a fund will rise or fall with interest rates. Generally, for each 1% rise or fall in interest rates, a fund’s value will rise or fall by a percentage equal to its duration.

Assuming a fund with a six-year duration, an increase in rates of 1% will cause the fund’s value to decline by about 6%. A decrease of 1% in the prevailing rates will cause the fund’s value to increase by about 6%. Given the historically low interest rate environment and the recent rise in yields, you need to consider the interest rate risk associated with a total bond index fund.

Second, the Bloomberg Barclays bond index is limited to fixed-rate securities. As a result, the index and the funds that track it do not invest in TIPS, which protect investors from unexpected rises in inflation and interest rates. TIPS are an important part of a well diversified portfolio—for investors wanting exposure to TIPS, they’ll need to consider other bond funds.


Forbes Advisor adheres to strict editorial integrity standards. To the best of our knowledge, all content is accurate as of the date posted, though offers contained herein may no longer be available. The opinions expressed are the author’s alone and have not been provided, approved, or otherwise endorsed by our partners.

Rob is a Contributing Editor for Forbes Advisor, host of the Financial Freedom Show, and the author of Retire Before Mom and Dad--The Simple Numbers Behind a Lifetime of Financial Freedom. He graduated from law school in 1992 and has written about personal finance and investing since 2007.

Ben is the Retirement and Investing Editor for Forbes Advisor. With two decades of business and finance journalism experience, Ben has covered breaking market news, written on equity markets for Investopedia, and edited personal finance content for Bankrate and LendingTree.

First Published: Aug 1, 2021, 10:17am

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