Could This Vanguard Bond ETF Help You Beat Inflation?

If you want your investments to grow vigorously over the long haul, buying stocks is usually a better choice than buying bonds. But don't take my word for it -- there are centuries of data to back that premise up.

The Deutsche Bank Research Institute's Long-Term Asset Return Study shows that during the past 200 years, U.S. stocks have delivered average annual inflation-adjusted returns of 6.7%, while 10-year U.S. Treasury bonds have returned 2.4% annually. And over medium-term periods, stocks also reliably beat bonds: During the past century in the U.S. market, bonds have never outperformed stocks over a 25-year time frame.

But for most investors, bonds are still worth having in your portfolio. And if you want your assets to hold their value against inflation over the next few years, putting some of your funds into the Vanguard Total Bond Market ETF (NASDAQ: BND) might be a good idea.

Why invest in bonds?

Recent years have been unusually hard for bond investors. In 2021, the U.S. experienced a spike in annual inflation to 7%, and that was followed by 6.5% inflation in 2022. In its efforts to get rising prices back in check, the Federal Reserve boosted its benchmark interest rate rapidly. That largely had the desired effect, but when interest rates rise, bond prices generally fall. As a result, the Vanguard Total Bond Market ETF had negative total returns in both of those years, losing 1.7% in 2021 and 13.2% in 2022.

Over the past five years, this bond ETF lost an average of 0.23% per year. And over a 10-year time frame, it still averaged positive annualized returns of only 1.9%. That's not enough to beat inflation even when it's at the Federal Reserve's 2% target.

So why invest in bonds? Many investors view putting 100% of their portfolio into stocks as too risky a strategy, especially if they're getting closer to retirement age. Bonds can provide a steady stream of interest income, and they are often less volatile than stocks. Moreover, bonds and stocks are negatively correlated: When stocks go down, bonds tend to go up, and vice versa.

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Vanguard research says "bonds are back"

Bonds have been performing better recently. The Vanguard Total Bond Market ETF has earned total returns of 6.7% in the past year. That was more than enough to beat inflation in 2025, which was only 2.6%. And Vanguard's 2026 Economic and Market Outlook report forecasts that bonds are likely to have a good run for the next few years.

The Vanguard research team projects 2.6% core inflation for 2026, and anticipates that over the next 10 years, annualized U.S. bond returns will land in the range of 3.8% to 4.8%. It also says that high-quality U.S. fixed income has the strongest risk-return profile of all public investments for the next five to 10 years. That's a bullish forecast for bonds.

If Vanguard is correct that U.S. inflation will stay under control and interest rates will stay high enough to deliver solid yields on bonds, now could be a good time to buy the Vanguard Total Bond Market ETF. This fund lets you own more than 11,000 U.S. government and investment-grade corporate bonds. And its expense ratio is an ultra-low 0.03%.

All that said, investing in bonds carries some risks. If interest rates go up, bond prices will come down. There is no guarantee that even the best bond ETF will beat inflation.

But we could be entering a more favorable environment for bonds than investors have seen in 10 years, so you may want to consider adding the Vanguard Total Bond Market ETF to your diversified portfolio.

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.