History Says This Is the Smartest Bond ETF to Buy With $1,000 Right Now

Times might feel uncertain and risky for bond investors. The Federal Reserve just hiked interest rates at its most recent meeting in September. "Trumpflation" and high levels of government debt are pushing up interest rates on long-term U.S. Treasury bonds. Is now a good time to buy bonds?

It depends on your goals as an investor. If you believe that interest rates are likely to stay steady or drop in the future, now could be a good time to lock in today's strong yields to earn income from bonds. But history shows us that bonds can be risky. No one knows which types of bonds (government or corporate) will outperform in the future. No one knows what will happen to interest rates, or which bond duration (short-term or long-term) will outperform others.

That makes it important to diversify your bond holdings. One simple way to invest in a diversified portfolio of bonds is to buy the iShares Core U.S. Aggregate Bond ETF (NYSEMKT: AGG). This fixed-income exchange-traded fund (ETF) lets you own thousands of bonds with a mix of durations. As of this writing, AGG is paying a 30-day SEC yield of 4.82%.

Let's take a closer look at why AGG is a good bond ETF for a $1,000 investment -- or more for long-term investors.

Image source: Getty Images.

AGG: 13,418 bonds, 23 years of 3.08% annualized returns

The iShares Core U.S. Aggregate Bond ETF is a well-diversified bond ETF that holds an impressive range of 13,418 bonds. Its top holdings include:

• Treasury bonds: 46.6% of the fund
• Mortgage-backed securities (MBS) pass-through: 22.85%
• Industrial: 14.35%
• Financial institutions: 8%
• Utility: 2.5%

The past few years have been difficult for bond investors, with rising interest rates starting in 2022. When interest rates go up, bond prices go down. During the past five years, AGG has delivered an average annual total return of -0.28%.

But over the long run, this bond ETF has delivered a solid return for fixed-income investors: 3.08% annualized returns since the fund's inception in September 2003.

Protecting against interest rate risk

This fund also holds a broad mix of maturities. As interest rates go up or down over time, longer-term bonds or shorter-term bonds might go up or down in price. This is called "interest rate risk" or "duration risk." Longer-duration bonds (with 10- to 20-year maturities or longer) are more sensitive to interest rate risk.

But sometimes when interest rates go down, like during an economic crisis or recession, longer-duration bonds perform better than short-term bonds. This bond fund owns both. About 19% of the iShares Core U.S. Aggregate Bond ETF holdings have maturities of 10 years or longer. About 41.5% of the fund's holdings are in shorter-term bonds with maturities of five years or less.

Bonds are not risk-free. Their prices can go down if interest rates go up. But if you want to buy bonds, you're likely going to be better off buying "all" the bonds at once. This is an impressively well-diversified bond ETF that could be a good choice for long-term investors.

Ben Gran has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.