Most Investors Pick the Wrong Bond ETF. I'd Buy BND and Never Look Back.

The bond market has been the biggest story on Wall Street recently, with some yields on U.S. Treasury bonds hitting new long-term highs. For example, on Tuesday, the 30-year Treasury bond yield hit its highest level since 2002.

Higher yields on bonds can be a double-edged sword. On the one hand, bond investors want to earn strong yields on their bonds, because that's the fixed income that is the reason for buying bonds in the first place. On the other hand, when bond yields go up, prices of existing bonds go down. Rising Treasury yields can be a sign that bond investors are getting nervous and are demanding to get paid better for the risks of holding bonds.

Instead of trying to pick bonds based on sector or type (like U.S. Treasuries vs. corporate bonds, or investment-grade vs. junk bonds), and instead of worrying about bond durations and interest rate risk, here's what I do with my bond investments: I buy the Vanguard Total Bond Market ETF (NASDAQ: BND).

BND is my choice for the best bond ETF because it's my favorite simple, low-cost way to just buy "all the bonds" in the U.S. market. Let's look at why BND might be the best choice for many long-term bond investors.

Why higher bond yields can be bad for bond investors

Just like stocks, the price of bonds is driven by the latest moves in the economy, inflation, and financial markets. No one knows what will happen next with all the risk factors that can make bonds vulnerable to a sell-off.

It's possible for bond investors to lose money if the price of their bonds goes down more than their yields pay in income. Bonds can also be risky based on the specific types of bonds you buy. Corporate bonds and some international government bonds have a risk of default -- companies sometimes struggle to pay their bills or even go out of business. Some countries (especially emerging markets) have a risk of defaulting on their national debt. When a default happens, their bondholders lose money.

Because of these risks, high-yield bonds or "junk bonds" pay better yields than U.S. government bonds. U.S. Treasury bonds offer a risk-free rate of return, but even those "safe" government bonds can deliver a negative total return based on the bond's duration and changes in interest rates.

Does that all sound way too complicated? If so, you might want to stop worrying about how to pick the right bonds. Choosing the "wrong bond ETF" can bring extra unnecessary risks into your investment portfolio. I buy BND to avoid these complications.

What's the best bond ETF? BND: Thousands of bonds, 0.03% expense ratio.

The Vanguard Total Bond Market ETF offers exposure to 11,421 bonds with a broad mix of bond issuers and durations. About 68.9% of the fund's holdings are in U.S. government bonds, and the rest of the fund is holding investment-grade corporate debt with credit ratings of BBB or higher. It charges an ultra-low expense ratio of 0.03%.

BND holds a broad mix of bond durations. This includes short-term bonds with maturities of a few years or less, and long-term bonds that mature in 20 years or more. But about 79% of the fund's holdings are in bonds with maturity dates of less than 10 years. The fund's average effective maturity is 8.2 years, making BND a "medium duration" bond fund.

For that reason, the Vanguard Total Bond Market ETF tends to pay a lower yield than longer-term Treasury bonds but is also less vulnerable to the risk of rising long-term interest rates. As of this writing, BND was paying a 30-day SEC yield of 4.98%.

The past few years of rising interest rates have been a drag on returns for BND. This fund has delivered average annual total returns of -0.31% for the past five years and 1.83% for the past year.

Why I'm buying BND even if interest rates go up

Here's how I think about buying bonds: Buying bonds when yields are high (and prices are low) is like "buying the dip." In the same way that buying stocks when stock prices are down is often a good move for long-term investors, I'm going to keep buying bonds on a regular basis, even if bond yields keep creeping up for the rest of 2026 and 2027.

In the long run, no one knows what's going to happen next with interest rates or bond prices. It's possible that 10-year Treasury yields and longer-term bond yields are going to keep pushing higher. Are higher bond yields a warning sign of a financial crisis or a stock market crash? Is the U.S. government on the verge of a national debt crisis?

Frankly, at this moment, I doubt it. Higher bond yields are not always a warning sign of worst-case scenarios. It's possible that higher bond yields are a healthy sign of a growing economy and lots of competition in the bond market for borrowers among corporate and government debt issuers.

Higher bond yields are a good thing for bond investors who buy bonds today. Investors deserve to get paid for the risks they take by locking up their money in long-term bonds. After so many years when yields were near zero, we might just be getting back to normal. I'm going to keep buying BND as part of my long-term investment plan.

Ben Gran has positions in Vanguard Total Bond Market ETF. The Motley Fool has positions in and recommends Vanguard Total Bond Market ETF. The Motley Fool has a disclosure policy.