Bond ETFs Are Surging in Popularity in 2025. Here Are 5 of the Best

Key Concepts

Bond ETFs: Exchange-Traded Funds that invest in bonds, offering diversification and income potential.
ETF Inflows: The amount of money investors are putting into ETFs.
Fed Funds Rate: The target interest rate set by the Federal Reserve.
Zero Interest Rate Policy (ZIRP): A monetary policy where central banks set interest rates near zero.
Passive vs. Active Management: Passive ETFs track an index, while active ETFs are managed by a portfolio manager.
Bloomberg US Aggregate Index: A widely followed benchmark for the US investment-grade bond market.
Core Bond ETFs: ETFs that track broad bond market indexes, offering diversification and low volatility.
Core Plus Bond ETFs: ETFs that include a small allocation to higher-yielding bonds, increasing risk and potential return.
Multisector Bond ETFs: ETFs that invest across various bond sectors, aiming for higher income.
High Yield Corporate Bond ETFs: ETFs that focus on bonds with lower credit ratings, offering higher yields but also higher risk.
Correlation: The statistical relationship between two assets' price movements.
Standard Deviation: A measure of an investment's volatility or risk.
Morningstar Ratings: A system used by Morningstar to evaluate investment funds.
Basis Points (bps): One-hundredth of a percent (0.01%).

Bond ETFs: A Banner Year for Investors

In the first nine months of 2025, investors have shown significant interest in bond ETFs, with hundreds of billions of dollars flowing into these investment vehicles. This surge in popularity is attributed to several factors, including the increasing preference for ETFs as an investment wrapper across all investor types, a response from asset managers creating more ETF products, and the current attractive yields offered by bonds, a stark contrast to the zero-interest-rate environment of the past decade. Furthermore, the stock ETF market is perceived as saturated, pushing investors to explore fixed income as a new frontier for growth and differentiation.

ETF Inflows and the Bond Market's Share

Overall ETF inflows have reached approximately one trillion dollars year-to-date. A substantial portion, around 30-33% (roughly a third), has been directed into bond ETFs, highlighting their significant role in the current investment landscape.

Passive vs. Active Bond ETFs

While both passive and actively managed bond ETFs are attracting capital, the flows are currently skewed towards passive strategies, with a roughly 60/40 split year-to-date. This is largely due to the prominence of large, established passively managed bond funds like Vanguard Total Bond Market ETF (BND) and iShares Core US Aggregate Bond ETF (AGG), which track the popular Bloomberg US Aggregate Index. However, active management in the bond ETF space is gaining traction, with increasing flows into these strategies.

Four Major Types of Bond ETFs

The discussion outlines four primary categories of bond ETFs that serve as building blocks for investor portfolios, each with varying levels of risk and return:

1. Intermediate Core Bond ETFs

Description: These ETFs are considered the foundational element for many portfolios. They typically track broad bond market indexes like the Bloomberg US Aggregate Index.
Role in Portfolio: They are used to balance the risk of stock holdings due to their low or negative correlation with equities and their generally lower volatility (measured by standard deviation).
Key Characteristics: Offer broad exposure to the bond market, excellent diversification, and low overall risk.
Top Ideas:
- Vanguard Total Bond Market ETF (BND): Tracks the Bloomberg US Aggregate Index, charges a low fee (22 basis points), and offers predictable performance.
- iShares Core US Aggregate Bond ETF (AGG): Also tracks the Bloomberg US Aggregate Index, with an identical fee to BND. Both BND and AGG are considered interchangeable core holdings.

2. Core Plus Bond ETFs

Description: These ETFs represent a step up in risk and potential return from core bond ETFs. The "plus" typically denotes some exposure to higher-yielding bonds.
Key Characteristics: While still broadly diversified and tied to the broader bond market (including Treasuries, investment-grade corporate bonds, and mortgage-backed securities), they incorporate a modest allocation (estimated 10-20%, or more than 5%) to higher-yielding segments. This results in a slightly higher yield and risk compared to core strategies. They maintain low correlation with stocks and serve a similar diversification purpose.
Top Idea:
- Fidelity Total Bond ETF (FBND): This actively managed ETF has earned a Gold rating from Morningstar. It taps into major bond market segments and incrementally increases exposure to the high-yield bond market for enhanced yield and return. It has a history of reliability and producing expected outcomes.

3. Multisector Bond ETFs

Description: These ETFs are designed with a more pronounced income orientation, aiming to increase returns by seeking higher yields.
Key Characteristics: They involve incrementally more risk than core plus strategies. The primary goal is to boost income and overall return. While they offer a reasonable level of diversification, their correlations with the stock market are still relatively low, though higher than core bond ETFs.
Consideration for Income Investors: Investors should not necessarily skip core or core plus strategies to start here. The decision depends on individual income needs and risk tolerance. Taking on more risk than necessary should be avoided.
Top Idea:
- JPMorgan Income ETF: This ETF, despite not having "bond" in its name, is a multisector bond ETF. It holds a Gold rating from Morningstar, and investors are fans of the management team and their process.

4. High Yield Corporate Bond ETFs

Description: These are the riskiest category among those discussed, focusing on corporate bonds with lower credit ratings (often referred to as "junk bonds").
Additional Risks:
- Increased Volatility: Due to their riskier nature and lower credit ratings, these ETFs are generally more volatile.
- Equity-Like Risk: They exhibit a higher correlation with the stock market. A significant downturn in the stock market is likely to result in a similar downturn for high-yield bonds, diminishing their diversification benefits as a stock hedge.
Enticing Yields: While the yields are attractive, investors must be aware of the trade-offs in terms of risk and diversification.
Top Idea to Watch (Actively Managed):
- Vanguard High Yield Active ETF: While Morningstar does not currently rate actively managed high yield bond ETFs, this is a new offering (launched a few months prior to the transcript) that is being monitored. It may take on slightly more risk than its mutual fund counterpart, potentially including triple-C rated bonds when opportunities arise. Its fee of 22 basis points is notably lower than competitors. Other actively managed high yield ETFs from Capital Group and JPMorgan are also worth noting.

Conclusion and Takeaway

The fundamental purpose of a bond ETF is to diversify stock holdings. While investors can increase risk to achieve higher yields or returns, this comes at the cost of some diversification benefits. The spectrum of bond ETFs ranges from the least risky core options to the more volatile high-yield segment.

Key Takeaway for Investors:

Start with the Basics: Begin with core index-tracking bond ETFs from iShares and Vanguard (BND, AGG) as a solid foundation.
Assess Risk Tolerance: Gradually move to core plus or multisector ETFs if higher income is desired and the increased risk is acceptable.
Understand Trade-offs: Be aware that higher yields in riskier bond categories come with increased volatility and a diminished diversification benefit against stock market downturns.
Consider Fees: Fees are a crucial factor, as highlighted by the Vanguard High Yield Active ETF's attractive pricing.

For a comprehensive list of bond ETFs rated by Morningstar, investors are encouraged to subscribe to the Morningstar ETF Investor newsletter.