As a Certified Financial Planner®, I'm often asked about portfolio allocation. In other words, how much money should you have in stocks? How much in bonds and other fixed-income investments?
I'm not giving personalized advice here, but I'm generally a fan of the "Rule of 110." This is a common asset allocation guideline that says if you subtract your age from 110, you'll find the percentage of your assets that should be in stocks and stock-based funds, with the rest allocated to bonds, which are lower risk. The older you are, the less time you have to weather stock market downturns.
Using myself as an example, I'm 42 years old. According to this rule, I should have about 68% of my portfolio in stocks, and the other 32% in fixed-income investments. I don't. In fact, I consider being able to analyze stocks and stock-based exchange-traded funds a core competency, so I've put most of my money in stocks throughout my investing career. I have some fixed income in my portfolio, but not nearly as much as I should.
I have absolutely no desire to research and buy individual bonds, so I'll be using the ETF approach to buy into bonds. While making my short list of fixed-income investments to consider, I found three that look like top picks.
The ultimate all-around bond fund
As the name suggests, the Vanguard Total Bond Market ETF (BND -0.21%) is designed as an all-in-one bond fund. It invests in government bonds and Treasury bonds, with a variety of maturity terms of both. Sixty-eight percent of the holdings are in government bonds, such as Treasuries, and the average maturity of bonds held by the ETF is 8.4 years. And just to illustrate how truly diversified of a bond fund this is, there are nearly 11,200 different fixed-income securities in it. https://investor.vanguard.com/investment-products/etfs/profile/bnd#portfolio-composition
The Vanguard Total Bond Market ETF has a rock-bottom 0.03% expense ratio, and passes the income received from its bonds to investors. So far in 2024, the ETF has generated an annualized yield of about 3.6%. In a nutshell, it's tough to make an argument against this ETF as a core holding if you need to increase your fixed-income exposure.
Long-term bonds can boost your income
As I mentioned, I'm 42, so I'm not as worried about ETF price fluctuations as I might be if I were in my 60s or 70s.
Generally speaking, long maturity bonds have higher rates than those with shorter maturities (although there are certainly exceptions -- just look at the inverted Treasury yield curve). And because they have fixed distribution rates for many years, the market value of long-term bonds tends to fluctuate quite a bit as prevailing interest rates change.
The Vanguard Long-Term Bond Index Fund (BLV -0.71%) is similar to the Total Bond Market ETF I talked about above. It has both government and corporate bonds and a low 0.04% expense ratio. But the average maturity in its portfolio is 22.5 years, and it has a 4.3% yield -- and its share price could be a major beneficiary as prevailing interest rates start to fall.
A higher-yield bond fund
Last but not least, the Vanguard Emerging Markets Government Bond ETF (VWOB -0.24%) invests in government bonds issued by countries such as Saudi Arabia, Mexico, Turkey, and Indonesia, just to name a few.
Obviously, these have a bit more risk than bonds issued by the U.S. government. Not all of the countries represented in the portfolio are as financially stable as the U.S., and there's also an element of foreign exchange risk, since the bonds are denominated in local currency. But this is a diversified (729 different bonds) fixed-income fund with a 5.6% yield that could be worth a look.
It's worth noting that this ETF has a slightly higher 0.2% expense ratio, which is quite normal for one with a more specialized investment focus.
These are just three examples of great fixed-income ETFs that are on my short list as I prepare to deploy some capital over the course of the next year or so. Fixed-income investments like these not only can generate stable income but can reduce the overall volatility of your portfolio. If you're lacking in fixed-income exposure, it could be a smart idea to take a look.
