A bond ETF is a great way to diversify and invest in many bonds in one go. It's a good addition to a balanced portfolio of ETFs. But there are hundreds of bond ETFs available, and not all that equally suited for Belgians. Some are poorly diversified, others aren't tax-efficient, or they're too expensive. We picked out the best bond ETFs so you don't have to.

Why bond ETFs are a good investment

A bond is like loaning money to a company or government. You give them money now, and they promise to pay you back later with a little extra as a thank you. Bonds are used by companies and governments to finance projects and operations.

Whereas stocks are very exciting (and scary when they sharply drop), bonds are boring. They don't fluctuate as much. So one way bonds are used in portfolios is to tame the volatility of stocks. As Ben Felix explained in his interview with us, bonds are designed not to seek return, but to decrease volatility and stabilise a portfolio. They're a crucial ingredient to build a balanced portfolio of ETFs that's aligned to you and your goals. Portfolios with more bonds relative to stocks will be better suited if you want to invest for a shorter period, or if you have a lower appetite for risk.

Beyond their role of stabilising a portfolio, bonds are also great diversifiers. It turns out that oftentimes when stocks are dropping, bonds are rising, and vice versa. So the losses of one type of asset can be partially offset by the gains of the other. In finance speak, we say that there is little correlation between stocks and bonds.

Bond ETFs offer several advantages over individual bonds. Firstly, they provide greater diversification, as a single bond ETF can hold a broad portfolio of bonds, spreading out the risk associated with any single issuer. This means that the impact of a default by any one bond issuer is reduced. Secondly, bond ETFs can be bought and sold on the stock exchange throughout the trading day, unlike individual bonds which may have less frequent trading. Additionally, bond ETFs often come with lower investment minimums, making them more accessible.

Lastly, distributing bond ETFs provide a stable income stream if you're living off your investments. In contrast to stocks, where a company can decide to change its dividend payout every quarter, the interest rate of a bond is determined at issuance and remains fixed.

Historical performance of a stock ETF vs bond ETF between 1994 and 2024
Despite their lower expected returns, a bond ETF serves as a great stabiliser in a portfolio (from Backtest)

How to select the best bond ETFs

There are some important criteria to look for when finding good bond ETFs for Belgian investors.

Follows an index

The style of investing based on indexes, also called passive investing, is a superior strategy for most people. Active funds, the type of fund offered by most banks, are a lot more expensive and yield lower returns than an ETF that simply tracks an index.

Government bonds or corporate bonds

Both governments and companies issue bonds. Government bonds are generally safer, whereas corporate bonds carry a bit more risk but yield a higher expected return. Both types of bonds are important to build a balanced portfolio.

Low cost

Most ETFs are already cheap compared to active funds. But when we have the choice between several ETFs tracking the same index, we prefer a cheaper one (all other things being equal). The cost is measured by the total expense ratio, also known as the TER.

Diversified across many sectors and countries

Diversification is important when investing because it helps to reduce the overall risk. The basic idea behind diversification is to avoid having all your eggs in one basket, so that the impact of a single negative event is reduced. For example, if you only hold bonds from a single country and that country experiences a downturn or crisis, the entire investment portfolio will be negatively impacted. However, if you had invested in bond ETF that diversifies across different industries, the impact of the downturn on the portfolio would be less severe.

Diversified across maturities

The maturity of a bond is the duration of the loan. It's like a due date: it's the day when the company or government that borrowed money by selling the bond has to pay back the money they borrowed. For instance, the Belgian government issues 1 year bonds. Suppose you buy this bond for €100. The government will pay you an interest throughout the year, and pay you back the €100 after exactly 1 year.

Bonds with shorter maturities are safer, because there is a higher chance that the government or company can pay back the loan. There's a greater chance that the Belgian government pays back your €100 loan next year than in 10 years, were you to invest in a 10-year bond. This also means that the expected return for bond ETFs with longer maturities is higher because you are rewarded for the higher risk.

Inside a portfolio, we seek bonds of all maturities for greater diversification.

Domiciled in Ireland or Luxembourg

Both countries have special tax treaties with many countries around the world. This makes it fiscally advantageous to invest in ETFs domiciled in Ireland or Luxembourg. You can recognise these by their ISIN code that starts with "IE" (Ireland) or "LU" (Luxembourg).

Size matters

Larger funds are less likely to be shut down. A reasonable guideline is to only consider ETFs that have at least €100 million under management.

Replication

Physical replication is preferred over synthetic replication to reduce third-party risk.

Accumulating or distributing?

Accumulating bond ETFs, which reinvest the interests of the underlying bonds to buy more bonds, are more in line with a passive investor. However, they are liable in Belgium for the Reynders tax, which is a 30% tax on profits when selling. In theory, distributing bond ETFs are exempt. However, it requires the fund provider to publish certain documentation about the ETF, which most foreign providers don't. So in practice, the Reynders tax should also be paid for most distributing bond ETFs.

Distributing bond ETFs are very useful when you use your investments as income because they provide a stable income stream. The interest rate of a bond is determined at issuance and remains fixed throughout the lifetime of the bond.

The best bond ETFs for Belgians

To help us choose the top bond ETFs, we spoke with Tim Nijsmans. He's the co-author of "De Hangmatbelegger", a book on passive investing that he wrote alongside Curvo co-founder Yoran. Let's start with an overview of our top bond ETFs:

ETF Type Region Cost (TER) Size
iShares EUR Corporate Bond ESG 0-3 Years (IE00BYZTVV78) Corporate Europe 0.12% €3,500m
SPDR Bloomberg Euro Corporate Bond (IE00B3T9LM79) Corporate Europe 0.12% €731m
Xtrackers II Eurozone Government Bond (LU0643975591) Government Europe 0.09% €805m
Xtrackers II Global Government Bond EUR Hedged (LU0378818131) Government World 0.25% €2,000m
iShares Global Government Bond (IE00B3F81K65) Government World 0.20% €845m
Vanguard Global Aggregate Bond (IE00BG47KH54) Mixed World 0.10% €596m

iShares EUR Corporate Bond ESG 0-3 Years (IE00BYZTVV78)

As Tim Nijsmans says, bonds are back on the investment scene. As of writing today, loans with short maturities bring higher returns than long-term ones. That won't last, but as long as it is the situation, you can invest in this ETF that tracks short-term corporate bonds through the Bloomberg MSCI Euro Corporate 0-3 Sustainable SRI index. These high-quality euro-denominated bonds have an average maturity of 18 months and give a nice return rate. It's also sustainable as it excludes bonds issued by companies that perform poorly on environmental, social and governmental criteria.

The ETF is diversified as it invests in over 1,200 different bonds. It's distributing, meaning that it pays out an interest, whilst costing 0.12% a year.

Based on historical data of the index and assuming interests are reinvested, it has returned an average 0.3% per year since 2016:

SPDR Bloomberg Euro Corporate Bond (IE00B3T9LM79)

Just like the previous ETF iShares EUR Corporate Bond ESG 0-3 Years, this ETF by SPDR invests in euro corporate bonds by tracking the Bloomberg Euro Corporate Bond index. But it's more diversified in two ways. First, it invests in bonds of all maturities, the average maturity being 5 years. Tim pointed out that Interest rates have risen sharply and even slightly longer corporate bonds now give an acceptable return to park your money. Secondly, it does not exclude bonds based on sustainability practices of the issuing company.

As a result, the ETF invests in over 3,200 high-quality euro bonds. With such a wide spread, the damage from an individual underperforming bond is barely noticeable. This ETF pays out its interest and the cost is 0.12% per year.

Based on historical data of the index and assuming interests are reinvested, it has returned an average 3.4% per year since 2009:

Xtrackers II Eurozone Government Bond (LU0643975591)

According to Tim, Eurozone government bonds are a very safe way to invest, as Eurozone governments are very solvent. Through this ETF that tracks the iBoxx EUR Sovereigns Eurozone index, we take up to 7-year loans on average. Longer maturities do mean that the bonds are more sensitive to changes in interest rates. If interest rates rise, this ETF may fall. But if interest rates go down, the prices of the bonds in the ETF will rise.

This ETF is distributing and consists of almost 500 different bonds. And at a cost of 0.09% per year, this is one of the cheapest bond ETFs available on the market. As a general rule, government bond ETFs tend to be cheaper than corporate bond ETFs.

Based on historical data of the index and assuming interests are reinvested, it has returned an average 3.1% per year between 1999 and 2023:

Xtrackers II Global Government Bond EUR Hedged (LU0378818131)

This ETF by Xtrackers tracks the FTSE World Government Bond Developed Markets index. It invests in government bonds, but globally rather than being limited to Eurozone countries. You get exposure to government bonds from United States, Japan, France, Italy, Germany, Spain, United Kingdom, Canada, Netherlands and our homeland Belgium 🇧🇪.

A peculiarity of this ETF is that it is hedged to the euro. This essentially means that you remove the impact of fluctuating currency rates, as for instance the United States issues its bonds in US dollar.

At an annual cost of 0.25%, it is among the most expensive government bond ETFs. One reason is the currency hedging, which requires the fund provider to buy financial derivatives to offset changes in currency rates. And these aren't free. In return, you do get more diversification as it invests in almost 1,200 bonds. The ETF is also accumulating, meaning it automatically reinvests interests.

Based on historical data of the index, it has returned an average 5.5% per year since 1985:

iShares Global Government Bond (IE00B3F81K65)

This is essentially a global government bond ETF that is not hedged to the euro. It tracks the FTSE G7 Government Bond index, which consists of bonds from G7 countries: Canada, France, Germany, Italy, Japan, United Kingdom and United States. All maturities are included.

It is distributing, invests in over 800 bonds and has a cost of 0.20% per year.

Based on historical data of the index and assuming interests are reinvested, it has returned an average of 4.2% per year since 1985:

Vanguard Global Aggregate Bond EUR Hedged (IE00BG47KH54)

To round off our list, we decided to highlight a mixed bond ETF, consisting of both government and corporate bonds. Mixed bond ETFs tend to offer a good balance between return and safety. And instead of having separate government and corporate bond ETFs, you simplify your portfolio with a single bond ETF that is highly diversified.

The ETF tracks the Bloomberg Global Aggregate Float Adjusted and Scaled (EUR Hedged) index and invests in over 10,000 bonds. It hedges to euro to remove the currency risk, and it's cheap with a total cost of only 0.10% per year. The ETF is accumulating.

Based on historical data of the index, it returned an average -1.8% per year since 2019. But don't let the low return of recent years scare you. The period is too short to make meaningful projections in the future. And bonds have been particularly hit by the rising interest rates in 2022 and 2023.

Which bond ETF to go for?

When building a diversified portfolio of ETFs, it's wise to include both corporate and government bonds. Corporate bonds offer a higher return on the long term, but fluctuate more. Government bonds offer stability and can reduce large drops. For instance, they were hardly hit by the 2008 financial crisis whereas corporate bonds were down a lot. Having both in a portfolio yields the best benefits.

The easiest option is to go for a mixed bond ETF like Vanguard Global Aggregate Bond EUR Hedged (IE00BG47KH54). You get a lot of diversification in a single bond ETF.

If you want to control the ratio of corporate bonds and government bonds in your portfolio, it's advised to use separate ETFs. SPDR Bloomberg Euro Corporate Bond ETF (IE00B3T9LM79) is the more diversified corporate bond ETF, if sustainability isn't important to you.

For government bonds, the Xtrackers II Global Government Bond EUR Hedged ETF (LU0378818131) is the most diversified. You do have the cost of hedging. The iShares Global Government Bond ETF (IE00B3F81K65) removes the hedging. And if you want the least volatility by eliminating currency risk, investing in eurozone government bonds through the Xtrackers II Eurozone Government Bond ETF (LU0643975591) is the way to go.

The downsides of bond ETFs

There are a few drawbacks of investing in bonds.

Low return of bonds

The biggest downside of bonds is their lower expected return compared to stocks. That's why most people should also include one or more stock ETFs in their portfolio. Some may even get by investing solely in stocks to achieve a higher expected return. But a portfolio consisting of only bond ETFs is advised only if your investment horizon is very short, or if you have a very low tolerance for risk.

Interest rate risk

Like individual bonds, bond ETFs are also subject to interest rate risk. When interest rates rise, the value of the bonds in the ETFs portfolio typically decreases, which leads to a decline in the share price of the ETF. On the other hand, bonds benefit when interest rates drop.

Inflation risk

Bond ETFs can be affected by inflation. If inflation rates rise, the real return, which is the return after adjusting for inflation, of the bond ETF can be negatively impacted.

Invest in a diversified portfolio through Curvo

We understand that investing in ETFs yourself can be daunting, especially if you're just starting to invest and trying to figure out how to build the best portfolio for you. We built Curvo to take away all the complexities of passive investing in ETFs and index funds. No need to search through thousands of ETFs or scour wikis in order to understand how to select a fund.

Invest in a portfolio tailored to you

Based on a questionnaire, the right mix of stock and bond funds is selected that correspond to your goals and appetite for risk. The portfolios are managed by NNEK, a Dutch investment firm supervised by the Dutch regulator (AFM). Each portfolio consists of highly diversified funds, and you'll be investing in 7,500 different companies.

Get a better return on your time

Don't waste energy figuring out the intricacies of good investing. Start your investment plan and spend your free time on the things that matter most to you.

How Curvo works
Create an account in only a few minutes!

Put your savings on autopilot

Investing part of your income every month is one of the best financial habits you can adopt for your financial future. Curvo makes this really easy. Choose an amount and it will automatically be invested every single month. Saving is easy when it's automated!

All your money is invested

With most brokers, you can only buy whole shares of an ETF. This can be cumbersome when the price of an ETF is high, and you'll always have cash sitting on your brokerage account doing nothing. But through Curvo, your investments work with fractional shares. This means that all your money is put to work.

No entry or exit fees

There are no transaction fees, entry or withdrawal fees.

Tax-optimised for Belgians

Each bond ETFs we mentioned above is liable for the Belgian transaction tax. You need to pay this tax every time you buy or sell an ETF. But one advantage of Curvo is that the Belgian transaction tax is not applicable. This means you’re saving between 0.12% and 1.32% per transaction depending on the ETF you choose.

Invest sustainably

Investing sustainably is challenging because everyone has different beliefs and values. We focus on one guiding principle: none of the portfolios invests in companies that we consider destructive to the planet.

Learn more about how Curvo works.

Summary

We discussed six popular bond ETFs available to Belgians, covering both corporate and government bonds. Each ETF has its benefits and drawbacks. The discussion should help you decide which is best for you. Don't let the poorer returns of bonds in recent years discourage you from investing in bond ETFs. They play an important role in stabilising your portfolio and are a crucial ingredient for most people to build the portfolio of ETFs that's aligned to them and their goals.

Questions you may have

Which ETF has the highest return?

Over the last 15 years, any ETF that tracks the Nasdaq-100 index, such as the iShares Nasdaq 100 ETF (IE00B53SZB19), has vastly outperformed the rest of the market. Between 2007 and 2023, it had an average yearly return of 15.7%!

But don't be seduced by its past performance. The main reason is that large tech companies like Apple and Amazon, which the Nasdaq-100 mostly consists of, have had great performance the past decade. But it's not a given that they will continue to outperform over the next decades. To prevent a bad outcome, it can be wise to diversify outside of just American tech companies.

Which ETF to buy in 2024?

If you're looking for stock ETFs, going for a diversified ETF like Vanguard FTSE All-World (VWCE) or iShares Core MSCI World (IWDA) is a good choice. They are globally diversified, accumulating and cheap.

What about the Belgian staatsbon?

The staatsbon is a bond issued by the Belgian government. Through the staatsbon, the government is raising money from its citizens in order to fund various parts of government. It's issued four times a year and offers a fixed rate with an annual return that ranges in length of time but with a minimum of one year. The minimum investment amount is €100.

The advantage of the staatsbon is that you know exactly how much you'll get at the end of year. On the flip side, you have to keep the bond until maturity, meaning your money is tied up. In contrast, you can sell an ETF at any time. In financial jargon, an individual bond like the staatsbon does not have the liquidity of an ETF.