In this piece, we will take a look at the ten best long term ETFs. If you want to skip our introduction to long term investing and recent trends in the stock market, then check out 5 Best Long-Term ETFs.
Investing comes in all flavors and variants. For the risk tolerant investor, the stock market carries the opportunity to significantly grow money in a matter of months if the bets are timed right and the risk of losing a significant portion of the investment is accepted. For those seeking stable income, dividend stocks offer a good alternative, as those that belong to stable companies often see their share prices remain stable.
On the other hand, bank accounts are for those who just want to see their money grow and don’t want to risk losing anything. Another form of stable investment, at least before the turmoil over the past year or so, is the bond market. The bond market is one of the biggest in the world since it allows not only companies but also governments to access financing. The structure of the securities that are traded on this market, namely notes that promise principal and coupon payments makes it more stable than the stock market. This is primarily due to two reasons. The first is that debt holders are guaranteed to get at least some of their money back if the bond is a secured bond, while the second is that bonds are also issued by governments which have a lesser chance of going bankrupt than companies.
However, this doesn’t mean that the bond market is not subject to turmoil. In fact, if you’ve been following the financial world recently, you’d know that there’s been a lot of trouble in the market as of late. This is because bonds are sensitive to interest rate changes, and their prices fluctuate based on market sentiment about the future direction of the rates. A bond’s coupon payment, i.e. the periodic payment that investors receive for providing their money, is fixed and based on an interest rate. Its price is the amount that’s paid for by the purchases, and the percentage of the coupon payment to the price is called a bond’s yield.
This yield fluctuates with respect to interest rate policies. For instance, consider the yields of 10-year U.S. government bonds. These are issued by the United States Treasury Department to meet its financing and other needs, and September has been a historic month for these bonds. The Federal Reserve, which has been increasing interest rates for well over a year now, shook up the market once again in September even though it decided to keep rates the same. This was because the bank hinted to markets that rates would stay higher for longer, and naturally, this didn’t bode too well for long term bonds that had already been issued. This pushed the yields for 10-year bonds to a 16 year high reading of 4.47%, as markets were surprised by the hawkish nature of the Fed’s announcement. The tone of the central bank’s message was surprising to some since both inflation and the labor market have behaved in a manner that is consistent with the Fed’s objectives of slowing down the economy sufficiently to bring down inflation but not damaging it to cause a recession.
While the stock market is not comparable to the bond market when it comes to long term investments, the fact is that over the long term, stocks deliver returns that are stunning, simply put. As an illustration, consider the fact that over the past five years, the S&P500 is up by 49%, meaning that if you had invested $10,000 in the market, your money would now be worth a cool $14,900. Returns for the tech heavy NASDAQ 100 index are even more fantastic, as it is up by a whopping 92% over the same time period – allowing the prudent investor a chance to double their money regardless of how fast the Fed is hiking interest rates, how high the inflation is, or if the economy might crash. These details are important as it was not only the bond market that was left scratching its head after the latest Fed announcements, since the three most widely quoted U.S. stock exchanges, namely the Dow Jones Industrial Average (DJIA), the S&P, and the NASDAQ Composite, dropped by 1.08%, 1.64%, and 1.82% on the day after the Fed’s announcement, respectively.
A key reason behind both the drops in the stock markets and the bond market relates to investor expectations about the future. The markets, after all, are a picture of what investors believe about the future, and the latest drops suggest that some folks are worried that the Fed might hold rates higher than is optimal as the effects of the current interest rate hikes are yet to fully reverberate through the economy.
These expectations can also materialize into market movements. For instance, billionaire investor Jeff Gundlach recently outlined that:
I think it’s quite likely there’s going to be rate cuts in the first half of next year. And I think they’re going to be bigger than the Fed thinks, as their base case.
When rates drop, then existing bonds become more valuable as they are issued with higher interest rates. This can lead to the bond market also gaining.
So, with these details in mind, we decided to take a look at some best long term ETFs out of which the top ones are Vanguard Long-Term Corporate Bond Index Fund (NASDAQ:VCLT), Invesco California AMT-Free Municipal Bond ETF (NYSE:PWZ), and Invesco National AMT-Free Municipal Bond ETF (NYSE:PZA).
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Our Methodology
To compile our list of the best long term ETFs, we first made a list of the 25 biggest ETFs that invest in long term bonds. Then, they were ranked based on their ten year annualized returns and the top ten ETFs are as follows.
10 Best Long-Term ETFs
10. PIMCO 15+ Year U.S. TIPS Index Exchange-Traded Fund (NYSE:LTPZ)
10 Yr. Annualized Return: 1.69%
The PIMCO 15+ Year U.S. TIPS Index Exchange-Traded Fund (NYSE:LTPZ) is an inflation protected bond fund that is part of the PIMCO fund family. The ETF invests in Treasury Inflation Protected Securities (TIPS) which are a financial vehicle designed to protect an investment against inflation. These bonds protect against principal devaluation in a high inflation environment, but they can drop in value if prices are falling. The shift in their value with respect to inflation is also reflected in the price performance of the PIMCO 15+ Year U.S. TIPS Index Exchange-Traded Fund (NYSE:LTPZ) which last closed at $53.64 and was trading at $93 in December 2021 when it became clear that inflation was not transitory as the Federal Reserve had initially believed.
Along with Invesco California AMT-Free Municipal Bond ETF (NYSE:PWZ), Vanguard Long-Term Corporate Bond Index Fund (NASDAQ:VCLT), and Invesco National AMT-Free Municipal Bond ETF (NYSE:PZA), PIMCO 15+ Year U.S. TIPS Index Exchange-Traded Fund (NYSE:LTPZ) is a top performing long term ETF.
9. Vanguard Long-Term Bond Fund (NYSE:BLV)
10 Yr. Annualized Return: 2.26%
Vanguard Long-Term Bond Fund (NYSE:BLV) is a long term bond ETF with a minimum investment of $3,000. The turmoil in the bond market, as interest rates continue to rise, has made the fund post year to date losses of 3.18%. The ETF is a blend of corporate and government bonds, and it limits itself to investing in securities that mature in ten years or more. It has net assets of $8.7 billion and was set up in 2019. Some top firms whose debt the Vanguard Long-Term Bond Fund (NYSE:BLV) holds are The Boeing Company (NYSE:BA) and AT&T Inc. (NYSE:T).
8. iShares Core 5-10 Year USD Bond ETF (NYSE:IMTB)
10 Yr. Annualized Return: 2.45%
iShares Core 5-10 Year USD Bond ETF (NYSE:IMTB) has $512 million in net assets and is part of the iShares fund family. The ETF invests in long term bonds, and it tracks the Bloomberg U.S. Universal 10+ Year Index. Close to 40% of its portfolio is in U.S. Treasuries, and on the corporate side of things, the ETF has invested 32% of its holdings in industrial firms and another 8% in financial services providers. The Bloomberg U.S. Universal 10+ Year Index has net assets that are worth $512 million, making it a mid sized ETF when compared to other funds.
7. VanEck Long Muni ETF (BATS:MLN)
10 Yr. Annualized Return: 2.57%
VanEck Long Muni ETF (BATS:MLN) was set up in 2008 and it has $436 million in net assets. The fund tracks an index that is made of tax exempt U.S. dollar bonds, and looking at the ETF’s performance relative to its benchmark index, it tends to slightly lag the ICE Long AMT-Free Broad National Municipal Index (MBNL) when delivering returns and losses. Since the fund has been trading since 2008, its best quarter in return terms was the third quarter of 2009, when it delivered 10.8% in returns. On the flip side, the worst quarter is quite recent, with the VanEck Long Muni ETF (BATS:MLN) losing 9.77% in the first quarter of 2022.
6. iShares 10+ Year Investment Grade Corporate Bond ETF (NYSE:IGLB)
10 Yr. Annualized Return: 2.77%
iShares 10+ Year Investment Grade Corporate Bond ETF (NYSE:IGLB) is part of the iShares fund family, and when compared to some of the other ETFs on our list, it is a sizeable fund with $1.9 billion in net assets. It tracks the ICE BofA 10+ Year US Corporate Index and has 3,542 holdings.
Vanguard Long-Term Corporate Bond Index Fund (NASDAQ:VCLT), iShares 10+ Year Investment Grade Corporate Bond ETF (NYSE:IGLB), Invesco California AMT-Free Municipal Bond ETF (NYSE:PWZ), and Invesco National AMT-Free Municipal Bond ETF (NYSE:PZA) are some best long term exchange traded funds.
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Disclosure: None. 10 Best Long-Term ETFs is originally published on Insider Monkey.