Investors Shift Focus: Bond ETFs as a Safe Haven Amid Market Volatility

Despite the S&P 500 crossing into positive year-to-date (YTD) performance, fluctuations in 2025 have made some investors wary, causing them to gravitate toward bonds. 

Several factors make bond investments appealing at this time. Interest rates remain elevated, and the Federal Reserve has indicated that economic developments could sustain these rates in the near future.

Even though markets appear stabilized, ongoing concerns about tariffs and other volatility drivers persist. For cautious investors, bonds could serve as a viable safe haven. However, some may point to credit risk and the potential for further interest rate adjustments as reasons to hesitate on bond investments.

For investors looking to expand their bond portfolios, exchange-traded funds (ETFs) can offer a convenient way to achieve diversification across different bond categories. While the suggested funds may not capture the entire bond market, they can help create a broad-based portfolio of bond investments with relative ease.

Exploring High-Risk, High-Reward Municipal Bonds

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The VanEck High Yield Muni ETF (BATS: HYD) focuses on municipal bonds that come with federal tax benefits. The bonds included in HYD’s portfolio are classified as high yield, meaning they are below investment grade and face a greater likelihood of default. This makes HYD a suitable option for those willing to take on higher risk for potentially greater rewards.

Nevertheless, HYD maintains a degree of diversification, encompassing around 1,600 holdings across various municipal sectors in the U.S. No single subgroup dominates the portfolio, with the largest positions constituting less than half a percent of the overall fund. Key holdings include municipal bonds from Puerto Rico, California, Arkansas, and Houston, Texas.

HYD’s dividend yield is an impressive 4.38%, and it boasts a low expense ratio of 0.32%, making it a solid option for generating passive income.

Diversifying with Build America Bonds

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The Invesco Taxable Municipal Bond ETF (NYSEARCA: BAB) also targets municipal bonds, specifically Build America Bonds (BABs) issued by U.S. states and territories. Unlike traditional municipal bonds, BABs are taxable.

Issuers of BABs receive a unique benefit from the U.S. Treasury, which pays 35% of the total interest owed to investors, thus impacting the effective interest rate.

Moreover, BAB leans toward investment-grade bonds, reducing risk levels and making it more appealing during market volatility compared to HYD. The fund consists of nearly 900 positions, with top holdings each representing approximately 1% of the total portfolio. Notable issuers include entities from California, the University of Texas, and Illinois. BAB offers a dividend yield of 4.03% with a modest expense ratio of 0.28%.

Exploring Corporate Junk Bonds for Yield Potential

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For those interested in a different bond segment, the SPDR Bloomberg High Yield Bond ETF (NYSEARCA: JNK) provides access to U.S. dollar-denominated high-yield corporate bonds, often referred to as junk bonds.

These bonds typically have a maturity of at least one year and a face value of $600 million or more.

Similar to HYD, JNK represents a riskier option in the bond market, as some holdings may have a higher chance of default compared to other bond ETFs.

Although JNK’s expense ratio is 0.40%, this comes alongside a higher dividend yield of 6.64%. Investors must weigh the risks associated with high-yield bond funds when considering JNK for their portfolio.

Accessing Emerging Markets for High-Yield Opportunities

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While the previous funds concentrate on U.S. bonds, the VanEck J. P. Morgan EM Local Currency Bond ETF (NYSEARCA: EMLC) provides exposure to debt from emerging markets.

This can be particularly appealing to those seeking a hedge against the U.S. dollar.

EMLC holds around 450 positions, featuring bonds issued by governments in Brazil, Turkey, Mexico, South Africa, and Poland, among others. This form of diversification can help mitigate risk, although investing in emerging markets generally carries higher risk levels than U.S. bonds.

EMLC offers an attractive dividend yield of 6.21% and a low expense ratio of 0.30%, making it one of the more cost-efficient bond fund options available.

Utilizing Bond ETFs for Yield and Stability

Amid economic uncertainty, elevated interest rates, and persistent geopolitical risks, bond ETFs present investors with a viable strategy for diversification, income generation, and risk management. Whether pursuing tax-advantaged income through municipal bonds, high-yield options with corporate or emerging market debt, or broad exposure across various credit profiles and geographic areas, these ETFs provide efficient means to build a robust bond allocation.

Investors should always assess their individual risk tolerance, income needs, and overall market outlook when choosing among these options. For those aiming to balance risk and reward in today’s intricate market landscape, these bond ETFs are essential tools for navigating uncertainty while ensuring consistent income.

The views and opinions expressed herein are those of the author and do not necessarily reflect the views of Nasdaq, Inc.