A total bond market index fund is a versatile investment option that offers both income and stability, especially during market downturns. These funds are known for their high degree of diversification, encompassing various types of bonds, such as government Treasury, agency bonds, mortgage-backed securities, and investment-grade corporate bonds with different maturity periods.
To achieve this broad exposure, the fund typically tracks a benchmark bond index, often the Bloomberg US Aggregate Bond Index, also known as Agg. Fund managers can use two main strategies – full replication or sampling – to mimic the index’s performance by purchasing all or most of the bonds within it.
One significant advantage of total bond market index funds is their cost-effectiveness. They generally come with low expense ratios, no front or back-end load costs, no 12b-1 marketing fees, and no transaction charges or commissions. Additionally, they tend to exhibit low tracking errors relative to their benchmark and enjoy consistent inflows, which helps reduce portfolio turnover.
In assessing the best total bond index funds available, various criteria are considered, such as the fund’s benchmark index, level of diversification, net expense ratio, and assets under management (AUM), among other factors. By thoroughly evaluating these aspects, investors can make informed decisions to select the most suitable total bond market index fund for their financial goals.
Compare the best bond market index funds
| FUND (TICKER) | NET EXPENSE RATIO | INDEX | MINIMUM INVESTMENT |
|---|---|---|---|
| Fidelity U.S. Bond Index Fund (FXNAX) | 0.025% | Bloomberg U.S. Aggregate Bond Index | $0 |
| Vanguard Total Bond Market Index Fund Admiral Shares (VBTLX) | 0.05% | Bloomberg U.S. Aggregate Float Adjusted Index | $3,000 |
| Schwab U.S. Aggregate Bond Index Fund (SWAGX) | 0.04% | Bloomberg U.S. Aggregate Bond Index | $0 |
| Northern Bond Index Fund (NOBOX) | 0.07% | Bloomberg U.S. Aggregate Bond Index | $2,500 |
| iShares U.S. Aggregate Bond Index Fund (BMOAX) | 0.35% | Bloomberg U.S. Aggregate Bond Index | $1,000 |
| T. Rowe Price QM U.S. Bond Index Fund (PBDIX) | 0.25% | Bloomberg U.S. Aggregate Bond Index | $2,500 |
Why other funds didn’t make the cut
The evaluation of funds was based on their tracking of the Bloomberg U.S. Aggregate Bond Index, with a primary focus on fees. Lower fees were preferred to ensure better returns. It is important to note that funds tracking the same index can still differ in returns due to their expense ratios. High expense ratios can have negative effects that compound over time and cause a bond fund to underperform its index.
To provide a fair ranking, we excluded total bond market funds with high expense ratios, 12b-1 fees, or sales loads. Minimizing fees becomes crucial in the context of lower bond returns, as it allows more money to be reinvested and compounded instead of going towards management fees.
Certain institutional-grade funds meant for professional investors, such as family offices and pension funds, were also excluded. These funds often have significant minimum investment requirements, making them inaccessible to most retail investors.
To ensure the focus remained on total bond market representation, we omitted funds that tracked government-only or corporate-only bond indices, as well as short-term or long-term-only bond indices. A total bond fund offers a broader level of diversification by encompassing various bond issuers, maturities, and credit qualities.
International bonds were excluded from the list to maintain a focus on total bond funds available in the U.S. market. While international funds can serve for diversification purposes, this list concentrated on funds within the domestic market.
Methodology
Our curated rankings of the top bond index funds were developed based on key metrics to ensure the best options for investors:
- AUM: We considered funds with an AUM of at least $1 billion. This indicates investor interest and trust, reflecting fund stability and longevity. Low AUM may put a fund at risk of closure.
- Expense ratio: All the bond funds screened have a net expense ratio below 0.4%. This helps boost long-term performance and reduces the fund’s deviation from its benchmark.
- Benchmark: The ranked bond funds track the Bloomberg U.S. Aggregate Bond Index or a variant, providing exposure to a wide range of the U.S. bond market in terms of issuer, credit quality, and maturity.
- Minimum investment: Each fund evaluated had a minimum required investment of $3,000 or less, making them more accessible to retail investors.
While an experienced fund analyst curated these funds, it’s essential to conduct thorough research to ensure they align with your financial goals and risk tolerance before making any purchase decisions.
Final verdict
Total bond market index funds are an excellent option for investors seeking to include fixed-income assets in their portfolios. These funds provide a comprehensive and diverse foundation for a well-balanced investment strategy. One prominent choice in this category is the Fidelity U.S. Bond Index Fund (FXNAX), which stands out due to its competitive fees and accessible features.
Investors can use total bond market index funds as a core holding and then further customize their bond allocation by adding funds with varying issuers, credit qualities, and durations. This approach allows them to align their investments with specific objectives and risk tolerance levels, creating a more tailored and personalized portfolio.
The Fidelity U.S. Bond Index Fund (FXNAX) distinguishes itself with its incredibly low expense ratio of 0.025%, making it a cost-effective option for investors. Additionally, there are no minimum investment requirements, transaction fees, sales loads, or 12b-1 fees, providing added flexibility and affordability.
Overall, the Fidelity U.S. Bond Index Fund (FXNAX) is a standout choice for investors looking to build a diversified and well-rounded bond allocation within their overall investment strategy. Its competitive fees and user-friendly features make it an appealing option for both seasoned investors and newcomers alike.
