Best Bond Funds UK – Invest with Zero Fees

Bond funds are a fantastic way to invest your money in a lower-risk fashion than traditional equity investments. The combination of capital growth and current income makes bond funds an attractive prospect for investors worldwide.

In this guide, we will discuss the best bond funds UK and how you can invest with an FCA-regulated broker – without having to pay any commissions!

Best Bond Funds UK List

If you’re looking for a quick rundown of the ten best bond funds UK for 2021, look no further. In the section that follows, we will review each of these funds in-depth, allowing you to make an informed investment decision.

  1. Vanguard Total Bond Market ETF (BND) – Overall Best Bond Fund UK – Invest Now
  2. iShares TIPS Bond ETF (TIP) – Best Bond Fund UK to Protect Against Inflation – Invest Now
  3. 20+ Year Try Bond iShares (TLT) – Best Bond Fund UK for High Returns – Invest Now
  4. Iboxx $ High Yield Corporate Bd Ishares (HYG) – Best Bond Fund UK for Passive Income
  5. SPDR Bloomberg Barclays High Y (JNK) – Best Bond Fund UK for High Yields
  6. iShares Emerging Markets Local Government Bond UCITS ETF (IEML.L) – Best Bond Fund UK to Invest in Emerging Markets
  7. Vanguard Short-Term Bond ETF (BSV) – Best Short-Term Bond Fund UK
  8. Vanguard Long-Term Bond ETF (BLV) – Best Long-Term Bond Fund UK
  9. BlackRock Charities UK Bond Fund – Best Bond Fund for Investing in UK Bonds
  10. PIMCO Active Bond Exchange-Traded Fund (BOND) – Best Bond Fund UK for Capital Growth

Best Bond Fund to Invest in Reviewed

Deciding on the best bond fund for you can be a daunting prospect. With various elements to consider, ranging from fund yields to expense ratios, it can be overwhelming to choose where to place your money.

Not to worry – in this section, we will discuss ten of the best bond funds UK, analysing the performance of each one to provide you with a comprehensive overview of the bond fund landscape.

1. Vanguard Total Bond Market ETF (BND) – Overall Best Bond Fund UK

To kick off our list of the best UK bond funds, we will start with one of the best all-round ETFs available. The Vanguard Total Bond Market ETF is a favourite of both retail and professional investors due to its exposure to investment-grade government bonds. These types of bonds are considered some of the safest you can invest in, as they are essentially backed by the power of the US government and have a very high credit rating. The only way they would default is if the US government suddenly decided to stop paying – which is highly unlikely!

Vanguard Total Bond Market ETF

The fund itself is made up of over 10,000 bonds, mainly with intermediate-term durations. In terms of performance, the Vanguard Total Bond Market ETF has only experienced a negative return in two of the past 13 years, even returning a healthy total return of 7.71% in 2020. Furthermore, with an expense ratio of only 0.03%, the fees associated with this bond are minuscule. So, if you are in the market for a cost-effective, low-volatility bond fund – this might be an excellent option for you.

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2. iShares TIPS Bond ETF (TIP) – Best Bond Fund UK to Protect Against Inflation

Common financial knowledge highlights that inflation and bond prices tend to be negatively correlated; as inflation rates rise, bond prices fall, due to inflation eroding the gains made through capital growth. If you are looking for one of the best bond funds UK that helps hedge inflation risk, the iShares TIPS Bond ETF is a fantastic option.

iShares TIPS Bond ETF

This fund invests in 53 of the best US TIPS, a specific type of bond that is protected against inflation. Through this investment, the iShares TIPS Bond ETF aims to protect investors’ capital from inflation effects whilst providing a solid yield in the process. The fund returned 10.91% in 2020, which is impressive given the impact of the Coronavirus pandemic. Furthermore, it also provides a small monthly cash payment to investors, based on an annual yield of 1.08%. These factors, combined with inflation protection, make this fund a solid option for many investors.

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3. 20+ Year Try Bond iShares (TLT) – Best Bond Fund UK for High Returns

One of the great things about long-term bond funds such as the 20+ Year Try Bond iShares is that the interest rate on the fund’s assets is essentially ‘fixed’ and usually higher than short-term bonds. This is because, due to the more prolonged nature of the duration, there is a more significant chance of default from these bonds than, say, a 1-year bond.

20+ Year Try Bond iShares

This can be showcased through the 20+ Year Try Bond iShares performance in 2020 – it returned an impressive 17.92%, outperforming both the FTSE 100 and the S&P 500. What’s more, it also produced a healthy 14.93% in 2019, which makes this fund one of the best for higher returns. Although the long-term nature of the bonds used in this fund makes it riskier than its peers, it is a great investment option for more risk-seeking people. Furthermore, if you want to invest in this bond fund, you can do so with eToro – completely commission-free!

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4. Iboxx $ High Yield Corporate Bd Ishares (HYG) – Best Bond Fund UK for Passive Income

If you are looking to gain exposure to the US bond market whilst earning a passive income stream, the Iboxx $ High Yield Corporate Bd Ishares is one of the best bond funds UK to do so. Holding 1,313 of the best corporate bonds from various durations, this fund seeks to provide both a similar yield to high yield ETFs and also a solid annual return to investors. With a solid price yield of 4.86%, this fund ensures investors receive a healthy passive income stream; for example, if you invested £1000 in this fund, you could expect to make £48.60 in interest income (minus fees).

Iboxx $ High Yield Corporate Bd Ishares

Looking at performance, the fund has returned an average of 7.11% to investors each year over the past five years. What’s more, the fund has only produced a negative return in two of the past twelve years. So, if you are looking to add a passive income stream to your portfolio, the iShares iBoxx $ High Yield Corporate Bond ETF is one of the best ways to do so as one of the best bond ETFs UK.

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5. SPDR Bloomberg Barclays High Y (JNK) – Best Bond Fund UK for High Yields

If you are happy to take on more risk to receive a higher yield, this fund might be ideal for you. The SPDR Bloomberg Barclays High Y is composed of a variety of ‘junk bonds’. These bonds are below investment grade and are considered much riskier – however, they often display much higher yields than their peers. Relating this to the SPDR Bloomberg Barclays High Y, this fund provides an impressive yield of 5.67% to investors.

SPDR Bloomberg Barclays High Y

Investing in 1163 USD-denominated junk bonds, this fund also provides access to an actively managed investment. The fund manager in charge will rebalance the asset allocation at the end of each month, ensuring an optimum risk/return profile. In addition, this fund also has a modest expense ratio of 0.40%, meaning if you invested £1000, you would only have to pay £4 in fees for the whole year. If you also want to avoid paying commission, we recommend investing with eToro – you can invest in this fund commission-free and for as little as $50 (around £36).

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6. iShares Emerging Markets Local Government Bond UCITS ETF (IEML.L) – Best Bond Fund UK to Invest in Emerging Markets

This fund is considered one of the best bond funds UK, and understandably so. The exposure this fund provides to emerging markets such as China and Brazil is an attractive prospect for several reasons. By investing in a combination of high yield and investment-grade treasury bonds, from a selection of countries in emerging markets, the iShares Emerging Markets Local Government Bond UCITS ETF provides investors with both diversification benefits and potentially high returns.

iShares Emerging Markets Local Government Bond UCITS ETF

Investing in emerging markets tend not to be as ‘consistent’ when it comes to returns due to the markets’ growing nature and the various geopolitical risks associated with them. This can be evidenced by the returns produced by this fund; negative returns of -7.15% were experienced in 2018, which then turned into a healthy positive return of 11.56% in 2019. This fund also provides a semi-annual distribution to investors, with a yield of 4.59%. If you’re interested in gaining exposure to emerging markets, we recommend using eToro to invest in this fund – it’s commission-free, and you can have an account set up in less than ten minutes!

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7. Vanguard Short-Term Bond ETF (BSV) – Best Short-Term Bond Fund UK

Short-term bonds are considered a safer investment than long term bonds; this is because there is less chance of short-term bonds suffering a default because of the reduced nature of their duration. Due to this, short term bonds are amongst the safest assets available and are even used as the ‘risk-free’ rate in financial models. However, because they are so low risk, they often have quite low annual returns.

Vanguard Short-Term Bond ETF

The Vanguard Short-Term Bond ETF provides investors exposure to the short-term bond market by investing in 2638 investment-grade bonds with a duration between 1-5 years. This fund has incredibly consistent past performance, making a positive return each year since 2008! However, in only one year have annual returns reached over 5%. Also, this fund has an incredibly low expense ratio of 0.05%, making it one of the safest and most cost-effective options on our list. If you have a large amount of capital and are happy making 1-4% each year consistently, this fund is worth considering.

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8. Vanguard Long-Term Bond ETF (BLV) – Best Long-Term Bond Fund UK

In contrast to the previous fund, the Vanguard Long-Term Bond ETF focuses on the long-term bond market. These types of the bond have longer durations, so are therefore deemed riskier due to the more significant potential for default across their duration. However, this risk is compensated by a greater return. This fund invests in a range of USD-denominated investment-grade bonds with maturities of 10 years or more, providing investors exposure to this section of the bond market.

Vanguard Long-Term Bond ETF

Looking at performance over the last few years, we can see that this fund does display larger volatility than the other funds in this list, having experienced negative returns in three of the previous ten years. However, in the years it has made a positive return, these have been quite considerable; the fund returned 19.09% and 16.24% in 2019 and 2020, respectively. Furthermore, this fund also has an annual yield of 3.07%, spread across monthly payments. All of these factors combine to make this one of the best bond funds UK to invest in.

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9. BlackRock Charities UK Bond Fund – Best Bond Fund for Investing in UK Bonds

If you are looking for exposure to the UK bond market specifically, this fund is for you. The BlackRock Charities UK Bond Fund invests in a selection of 135 UK GILTs, which is short for ‘Gilt-Edged Security’. These GILTs are essentially the UK-equivalent of US treasury bonds and showcase a very low risk of default and a low rate of return.

BlackRock Charities UK Bond Fund

This fund has displayed great consistency over the past five years, only making a small negative return of -0.43% in 2018, whilst the other years have seen the fund return more than 6% on three occasions. It also has a price yield of 3.73%, meaning investors can expect another stream of income through interest payments generated by the GILTs. With solid returns and a low-risk nature, this fund is a favourite of many investors interested in the UK government bonds market.

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10. PIMCO Active Bond Exchange-Traded Fund (BOND) – Best Bond Fund UK for Capital Growth

The final fund we will discuss is the PIMCO Active Bond Exchange-Traded Fund. Through intelligent management, this fund aims to provide long-term capital growth for investors by investing in 1149 bonds, ranging from investment grade to mortgage-backed securities. Although slightly riskier than some other funds due to the diverse nature of the assets included, this fund is actively managed, which means that the fund manager will rebalance the investments periodically to optimise its risk/return portfolio.

PIMCO Active Bond Exchange-Traded Fund

Looking at performance, this fund returned a solid 7.63% in 2020 and also returned 8.69% the year previous. Furthermore, it also provides investors with a decent yield of 2.65%, distributed each month. Finally, it does have a slightly higher expense ratio of 0.57%. However, if you do like this fund, you can avoid additional commission fees by investing with eToro as they operate under a 0% commission model. Furthermore, you can also invest for as little as $50.

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What are Bond Funds?

Put simply, bond funds are a specific type of mutual fund that invests exclusively in bonds. Much like other types of funds, bond funds pool money together from a range of investors, both retail and professional. They then invest this money on their behalf to produce capital growth and generate income for investors through periodic interest payments, expressed as the fund’s yield.

As bond funds invest solely in bonds, they are considered a much safer option than investing in other, riskier funds such as equity funds. Due to them being safer, the returns produced by bond funds are typically lower than their peers. However, if you are in the market for a low-volatility asset that delivers consistent and gradual returns, they are a great option.

An excellent example of bond fund returns is highlighted in the image below. It showcases the returns produced by various UK-based bond funds in 2020 and pinpoints how they suffered a minor setback at the onset of the pandemic in March but then recovered and produced consistent returns for the remainder of the year.

uk bond fund returns

Bond fund types vary depending on the specific bonds they invest in. Some will focus primarily on Treasury bonds, which are debt securities issued by the US government and are deemed one of the most ‘risk-free’ assets you can invest in. Other bond funds may focus on corporate or municipal bonds. In addition, bond funds can also differentiate themselves through the length of the bonds they invest in; some may opt for safer, short-term bonds, whilst others may take on more risk and opt for longer-term bonds.

Why Invest in Bond Funds?

There are a variety of reasons why financial advisers say that bond funds are one of the best ways to invest money. This section will discuss three of the main arguments for bond funds is one of the best financial instruments to invest in.

Cost-Effective Way to Generate a Return

One of the best features of bond funds is that they can provide a cost-effective way to gain exposure to the bond market. If you were to invest your money into various bonds manually, you would incur a commission for each trade you opened, depending on which broker you used. What’s more, you’d also have to do tons of research to determine which bonds are the best to invest in.

However, with bond funds, you get access to professional investment management through the fund manager. The manager will use his/her expertise to pick the best assets and optimise the risk/return profile of your investment. To highlight this, the image below shows returns generated by the BlackRock Charities UK Bond Fund – showcasing the performance benefits of investing in an actively managed fund.

invest in bond funds uk

What’s more, these funds often charge a very low annual fee called an expense ratio, usually ranging from 0.1% to 0.8% of your investment (but can be more depending on the issuer). If you’d like, you can even avoid paying any commissions on your bond fund investing if you invest with eToro – you can enter any of the funds listed in this guide commission-free and for as little as $50

Diversification

Another reason to invest in bond funds is the diversification benefits they offer. If you hold a portfolio that is biased towards equities, it is wise to consider adding a bond fund investment into the mix too. This is because bonds tend to become more attractive if equity markets experience a downturn, as investors will flock to ‘safer’ assets such as bonds. In turn, this pushes the price of bond funds upward.

Diversification from bond funds can also come from geographical factors. If you are a UK investor, you can invest in a bond fund focused on US Treasury bonds, giving yourself exposure to a different market. If these bonds have a sufficient negative correlation with other assets in your portfolio, they can help offset any losses you may experience during a market downturn.

Hedge Against Equity Market Shocks

The third reason why bond funds are a good investment is that they can hedge against market shocks, especially related to equity markets. As touched on previously, bond funds tend to do well in times of uncertainty as investors flock to these assets due to their low volatility. Thanks to this, price increases and more capital growth can occur.

Due to this, many investors use bond funds to safeguard their portfolios in anticipation of market shocks. Taking 2020 as an example, many equity funds suffered a negative annual return due to the uncertainty caused by the Coronavirus pandemic. However, as bond funds became more attractive thanks to this uncertainty, returns generated through these funds actually went on to outperform many index funds thanks to their low-volatility nature.

Best Bond Funds Brokers

One of the most important aspects to consider when investing is which broker to use to facilitate your investment. In this section, we discuss two of the best Uk trading platforms to invest in bond funds.

1. eToro – Best Overall Platform to Invest in Bond Funds UK with Zero Commission

etoro logo

eToro is our recommended broker when it comes to investing in bond funds for a variety of reasons. Having been in operation for over 13years, eToro has a fantastic reputation worldwide, boasting over 20million users. Furthermore, eToro is regulated by the Financial Conduct Authority (FCA), providing a solid layer of protection to your money and personal details.

invest in bond funds with etoro

67% of retail investors lose money trading CFDs at this site

One of the main reasons we recommend eToro for investing in bond funds is that they allow this to be done commission-free. When you invest in funds, you always have to pay a small expense ratio every year (charged by the fund provider). With eToro, this is the only fee you will pay as you’ll avoid any hefty commissions, meaning more of the profits are yours to keep.

Furthermore, you can invest in bond funds with eToro for as little as $50 (roughly £36). This means that these funds are accessible to a wide range of investor types and don’t require large amounts of capital to get involved in. Also, you can even use eToro’s demo-account feature to test the waters before you invest for real.

etoro invest in funds

Finally, if you’d like to add other assets to your portfolio along with bond funds, eToro offers a vast range of investment options to choose from. With over 2000 stocks available, along with a large number of ETFs, commodities, and even cryptocurrency, eToro is sure to offer something for everyone.

Pros:

  • Super user-friendly online trading platform
  • Invest in bond funds without paying any commissions
  • Trade CFDs in the form of stocks, indices, commodities, forex, and more
  • 2,400+ stocks listed on the UK and international markets
  • Deposit funds with a debit/credit card, e-wallet, or UK bank account
  • Ability to copy the trades of other users
  • FCA and FSCS protections

Cons:

  • Not suitable for advanced traders that like to perform technical analysis

67% of retail investors lose money trading CFDs at this site

2. Fineco – Cost-Effective Platform to Invest in Bond Funds UK

Fineco logo

Our second favourite broker when it comes to bond fund investing is Fineco. Fineco is a fantastic investment platform to use to facilitate your bond fund investing, as they are low-cost and one of the best FCA-regulated brokers. Furthermore, they have a solid reputation in both the UK and Italy and are even listed on the Italian stock exchange.

fineco commissions and fees

Fineco does not charge a fee to open a position in their fund selection; however, they charge a minimal fee for holding the fund, equating to 0.25% of your investment up to £250k. So, if you invested £1000 in a fund with Fineco, you’d have to pay £2.50 to the broker each year. In addition, you would also have to pay the expense ratio that the fund provider charges.

Besides their holding fee, Fineco does not charge anything else to use their brokerage services – no account fees, inactivity fees, withdrawal fees, or deposit fees. Account opening is also straightforward and can be completed digitally. Also, Fineco does not have a minimum deposit amount to open your account, which is great for beginner traders who wish to test the waters first.

Pros

  • No dealing charges when investing in bond funds
  • Access to thousands of UK and international shares
  • Deposit funds with a UK bank account
  • Heavily regulated, including an FCA license
  • Listed on the Italian Stock Market
  • Offers ISAs and SIPPs
  • All personal data protected

Cons

  • 0.25% annual fee
  • No support for debit or credit cards

Your capital is at risk.

How to Invest in Bond Funds on eToro Tutorial

If you’re interested in investing in a bond fund and wish to know precisely how to do so, then this section will provide the answers. We will show you exactly how to make your bond fund investment using FCA-regulated broker eToro.

Step 1: Open your eToro Account

The first step involves beginning the account opening process. Simply head to eToro’s website (or download their investment app) and click the ‘Join Now’ button. After this, you’ll have to enter some relevant personal information, along with your contact information and National Insurance number.

etoro sign up

67% of retail investors lose money trading CFDs at this site

Step 2: Verify your ID and Address

eToro operates under strict FCA guidelines, so new users must verify their ID and address before investing. Not to worry – this process is quick and easy. Simply upload proof of ID (a copy of your passport or driver’s license) and proof of address (a copy of a bank statement or utility bill), and you’ll be good to go.

Step 3: Deposit Funds into your Account

You will now be able to fund your account and can do this in various ways, such as credit/debit card, bank transfer, or e-wallet. However, if you are looking for the fastest method, we recommend a credit/debit card as the funds will arrive instantly.

Step 4: Search for your chosen Bond Fund

To search for your chosen fund, simply click on the search bar at the top of the screen and type in the fund’s name. We will use the Vanguard Total Bond Market ETF as an example in the image below. Once you have found the fund, click on it, and then click ‘Trade’ on the next screen.

etoro invest in bond fund

67% of retail investors lose money trading CFDs at this site

Step 5: Invest in a Bond Fund UK

You’ll now see an order box like in the image below. Simply enter the amount you’d like to invest (minimum of $50), double-check everything is correct, and click the ‘Set Order’ button.

etoro invest in bond fund UK

And that’s it! You have just completed a commission-free investment in a bond fund!

Conclusion

In this guide, we have examined the best bond funds UK, discussing the various elements you need to be aware of to make an informed investment decision. Whether you are looking to invest in corporate bonds, investment-grade bonds, or anything in between – bond funds provide an attractive and cost-effective method to do so.

If you’ve decided you wish to invest in a bond fund and earn a return, we recommend using eToro. As an FCA-regulated broker, eToro offers the highest security levels for your money, allowing you to invest with confidence. What’s more, with a commission-free service and a minimum investment of only $50 (around £36), eToro remains one of the most straightforward and cost-effective ways to invest in bond funds.

eToro – Invest in Bond Funds UK with 0% Commission

67% of retail investor accounts lose money when trading CFDs with this provider.

FAQs

What is a Bond Fund?

Bond funds are a type of mutual fund that invests primarily in bonds. They work by pooling money from investors and investing that money in fixed-income instruments to make a return. Due to holding bonds rather than equities, bond funds are typically less volatile but exhibit lower returns.

How do Bond Funds work?

Bond funds work by gathering money from various investors then investing that money into multiple bonds, such as corporate bonds, government bonds, and municipal bonds. Through these investments, bond funds create a return for investors through capital growth and current income from interest payments.

What is the best Bond Fund?

The best bond fund comes down to personal preference and your unique investment goals. However, one of our recommended bond funds is the Vanguard Total Bond Market ETF, as it covers all the bases when it comes to investing in the bond market.

Why do bond funds go down?

The main reason that bond funds go down is when interest rates rise. Bond prices are negatively correlated with interest rates, so when interest rates rise, bond prices fall, thereby impacting the cost of bond funds. The other major reason that bond funds go down is changes in the inflation rate. As high inflation erodes gains made from bond interest rates, this makes bond funds less attractive and, in turn, reduces their price.

When is the best time to buy bond mutual funds?

There is no 'best time' to buy bond mutual funds, as they are a good value proposition in various situations. However, some ideal times to invest in bond funds could be in times of market shock when you need a 'safer' investment or when you are nearing retirement age and looking for a steady income stream.

About Connor Brooke PRO INVESTOR

Connor is a Scottish financial expert, specialising in wealth management and equity investing. Based in Glasgow, Connor writes full-time for a wide selection of financial websites, whilst also providing startup consulting to small businesses. Holding a Bachelor’s degree in Finance, and a Master’s degree in Investment Fund Management, Connor has extensive knowledge in the investing space, and has also written two theses on mutual funds and the UK market.

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