10 Best Bond ETFs for a Slowing Economy in 2024

Approaching midyear, economic reports are increasingly showing signs of slower economic growth ahead, setting the stage for an improved fixed income environment in the second half of 2024.

Amid a slowing economy, when inflation is cooling and interest rates are falling, the best bond ETFs for price appreciation will be those investing in longer maturities while the higher yields and lower price risks are associated with the shorter duration bond funds. 

Signs of cooling inflation have returned as the latest Consumer Price Index report revealed that prices for a select basket of goods and services did not change in May while the unemployment number hit 4% for the first time in this cycle.

Other signs of a slowing economy include the University of Michigan consumer sentiment, which fell for a third straight month in June, and the Conference Board Leading Economic Index, which decreased by 0.5 percent in May following a 0.6 percent decline in April. 

What does that mean for bonds in the months ahead? 

Keeping in mind that investors may have a range of fixed income needs and varying risk tolerance, we spotlight a diverse list of 10 best bond ETFs for 2024.  

Advantages of Bond ETFs in 2024

Bond ETFs can offer several potential advantages for investors in 2024. While analysts generally do not expect a recession to start this year, GDP is expected to fall below 1% as consumers battle high prices and record debt levels. In this environment, the Fed has more reasoning to lower interest rates, which would lead to higher potential for bond price appreciation. Bond ETFs also offer other benefits, such as income generation and diversification:

Price Appreciation Potential and Recession Hedge

If interest rates decline in 2024, the market value of bond ETFs will likely increase, as prices move in the opposite direction of rates. If the U.S enters a recession, a fall in rates would be more pronounced, which would make price appreciation greater for bond ETFs, especially those that track a long-term bond index. 

Relative Safety to Stocks 

In a slowing economy, bond prices tend to be more stable, and generally positive, compared to stocks. While the U.S. economy may remain strong enough to support higher stock prices in 2024, the risk of a significant correction is at least elevated compared to 2023.  

Income Generation

While bond yields could fall in 2024, they are still near highs not seen in 16 years. Bond ETFs typically pay interest or coupon payments to investors based on the yields of the underlying bonds. This can make bond ETFs attractive to income investors, especially those that prefer monthly dividend and interest payments, as most single-issue bonds have semi-annual or annual payments. 

Risk Management Through Diversification

Bond ETFs provide risk management benefits by allowing investors to diversify across various bond issuers, maturity and credit quality. This diversification can be particularly beneficial in 2024, as different segments of the bond market may respond differently to rate changes. 

Liquidity

Bond ETFs trade on stock exchanges, providing investors with liquidity. In a shifting economic environment, investors may want to adjust their fixed-income exposure quickly. The ability to buy or sell bond ETF shares throughout the trading day at market prices enhances liquidity and flexibility. 

2024’s Best Types of Bond ETFs to Invest In

Here are some types of bond ETFs that investors may consider when the economy is slowing: 

Long Term Treasury ETFs

Long term bond ETFs provide exposure to bonds with maturities greater than 10 years. Since longer-term bonds are more sensitive to changes in interest rates than shorter-term bonds, they would typically have greater price appreciation in a falling interest rate environment.

Long-term Treasury bond ETFs, such as the iShares 20+ Year Treasury Bond ETF (TLT) and the Vanguard Extended Duration Treasury Index Fund ETF (EDV) can be good choices for price appreciation potential.

Intermediate Term ETFs

Intermediate-term ETFs focus on bonds with maturities typically ranging from 3 to 10 years. These funds can offer a combination of decent yields and price appreciation potential in a slower economy, but with less interest rate risk than long-term bond ETFs.  

The largest ETFs in this category include the Vanguard Intermediate-Term Corporate Bond ETF (VCIT) and the iShares 7-10 Year Treasury Bond ETF (IEF).  

Short Term Treasury ETFs

Short-term Treasury ETFs are generally considered to be relatively safe investments as they focus on Treasury securities with shorter maturities, typically ranging from a few months to a few years. Shorter maturities mean that these ETFs are less exposed to interest rate risk compared to longer-term bonds. In 2024, these ETFs have also provided attractive yields.

Some of the largest choices in this category include the iShares 0-3 Month Treasury Bond ETF (SGOV) and the iShares 1-3 Year Treasury Bond ETF (SHY).

Broad Market Bond ETFs

Investors wanting to take a diversified approach and cover the entire U.S. bond market in one fund can consider funds with high AUM and low expenses in this category, such as the Vanguard Total Bond Market ETF (BND).

For investors wanting to diversify around the world, the Vanguard Total International Bond Market ETF (BNDX) is the largest fund choice. 

Municipal Bond ETFs

Municipal bond ETFs, such as the iShares National Muni Bond ETF (MUB) or the Vanguard Tax-Exempt Bond ETF (VTEB), can be appealing for investors in high tax brackets who are investing in a taxable brokerage account, as income is tax-free at the federal level. These funds both offer diversified exposure with municipal bond holdings averaging intermediate-term duration and investment grade quality.  

The Best Bond ETFs for 2024’s Economy 

Data as of June 20, 2024. 1-month return selected to reflect short-term performance as economic conditions weakened. Past performance is no guarantee of future results. 

Bottom Line on Best Bond ETFs for 2024

While bond ETFs may offer many potential advantages in 2024, including relative safety to stocks and price appreciation in a falling rate environment, investors should carefully consider their investment goals, risk tolerance and time horizon when choosing these or any investments. Economic conditions and interest rate trends can change, and staying informed about market dynamics is crucial.  

For more guidance in choosing ETFs, investors can use etf.com’s ETF screener and the ETF comparison tool.