My recommendations for bond ETFs

The Vanguard Total Bond Market ETF (BND) and Vanguard’s Intermediate-Term Bond ETF (BIV) are often recommended in personal finance literature as reasonable options for bond ETFs. What would be the comparable choices available for European investors?

Similarly to my recommendations for equity funds, I think these suggestions may be useful for many investors but they might not be applicable to all investors. The most important skill is knowing how to choose a bond ETF so you can make these types of decisions.

When choosing a bond fund these are the things I care about the most:

  • assets in EUR or EUR hedged – currency volatility has a significant impact on bonds returns so I want to minimize this risk.
  • high credit rating – this would be the high (preferred) and medium boxes of the morning star box for fixed income. Since bonds are meant to reduce the volatility of my portfolio, I want to minimize credit risk.
  • intermediate-term bonds – Long-term bonds have historically not returned more than intermediate-bonds even though they have higher risks.
  • funds which hold mostly government bonds as corporate bonds may not perform well in the event of a financial crisis.

Given those constraints my preferred choice is Xtrackers Global Sovereign EUR hedged fund. I like the fact that it has bonds from global developed countries reducing the vulnerability to event risk in the Eurozone while still having high credit quality. It has ~30% holdings in long-term bonds which I’m not a fan of. The current YTM (1.76%) is higher than the TER (0.25%).

Besides this fund, a popular recommendation is iShares Global Aggregate Bond. I think it is an OK choice – global diversification, low TER, investment grade bonds. But I would not pick it because it holds corporate bonds and bonds from developing markets. This additional risk is rewarded with a higher YTM (2.19%) though.