The Best Brokerage Firm for Bonds

At the highest level, asset allocation for your investments involves a split between stocks and bonds. You can just buy one fund that includes both stocks and bonds, or you can invest in bonds separately in the form of bond fund(s), bond ETF(s), or individual bonds.

Bond Funds

If you prefer to invest in bonds through open-end mutual funds, Vanguard is the best place to go. Vanguard offers an extensive list of bonds funds — Treasury, corporate, muni, short-term, intermediate-term, long-term — all with very low fees. Vanguard Total Bond Market Index Fund has over 8,000 bonds in it and it only charges 0.05%. Vanguard Inflation-Protected Securities Fund invests in inflation-indexed Treasury bonds and its expense ratio is only 0.10%.

Fidelity also offers many bond funds. Some of them have fees even lower than similar funds from Vanguard, for instance:

• Fidelity U.S. Bond Index Fund (FSITX, expense ratio 0.025%)
• Fidelity Inflation-Protected Bond Index Fund (FSIYX, expense ratio 0.05%)
• Fidelity Short-Term Treasury Bond Index Fund (FSBAX, expense ratio 0.03%)
• Fidelity Intermediate Treasury Bond Index Fund (FIBAX, expense ratio 0.03%)
• Fidelity Long-Term Treasury Bond Index Fund (FLBAX, expense ratio 0.03%)
• Fidelity Short-Term Bond Index Fund (FNSKX, expense ratio 0.03%)

Some other Fidelity bond funds have higher fees than similar Vanguard funds.

Charles Schwab offers fewer bond funds than Vanguard or Fidelity. Like Fidelity, some of Schwab’s bond funds have low fees, for instance:

• Schwab U.S. Aggregate Bond Index Fund (expense ratio 0.04%)
• Schwab Treasury Inflation Protected Securities Index Fund (expense ratio 0.05%)

Some other Schwab bond funds have higher fees than similar Vanguard funds.

Bond ETFs

I’m not a fan of bond ETFs. Because most bonds don’t trade on an exchange, it’s hard to get the pricing of the underlying bonds by the minute. As a result the price for a bond ETF can deviate from the prices of its underlying bonds more than the price of a stock ETF can deviate from the prices of its underlying stocks.

But if you still prefer bond ETFs you can buy them at any broker. Some ETFs are commission-free at certain brokers. Vanguard will make almost all ETFs commission-free at Vanguard starting in August 2018. Fidelity has a number of iShares ETFs commission-free. Charles Schwab has its own Schwab ETFs commission-free. Some popular bond ETFs include:

• Vanguard Total Bond Market ETF (BND)
• iShares Core US Aggregate Bond (AGG)
• Schwab U.S. Aggregate Bond ETF (SCHZ)

Individual Bonds

You can also buy some individual bonds and hold them to maturity. I would only do it with Treasuries, Treasury Inflation Protected Securities (TIPS), and CDs. I wouldn’t buy individual corporate bonds, high yield bonds, or muni bonds.

The easiest way to buy individual Treasuries, TIPS, and CDs at a broker is to buy them as new issues. Vanguard, Fidelity, Schwab, and E*Trade don’t charge any commission on online trades for new-issue Treasuries and TIPS. TD Ameritrade charges $25. Only when Treasuies and TIPS are sold at the Treasury auction do you pay the same price for your small order as a large institution who buys $100 million.

I use Fidelity when I buy new-issue individual Treasuries and TIPS. I’m very satisfied with their service.

If a new-issue isn’t available for the term you’d like or if you must sell a before it matures, you will trade on the secondary market. Buying on the secondary market is in some way like buying a used car. Someone pre-owned the bond and now they are selling it to you. Vanguard, Fidelity, Schwab, TD Ameritrade, and E*Trade don’t charge any commission on buying or selling Treasuries and TIPS on the secondary market but the prices they quote to you can include a markup or markdown. It’s hard to say which broker offers better pricing in general. The size of the markup or markdown can be different on different bonds on different days at different brokers. This is why it’s much easier to buy them as new issues.

For buying or selling brokered CDs on the secondary market, Fidelity charges $1 per $1,000 in face value with no minimum if you place the order online. Charles Schwab and E*Trade also charge $1 per $1,000 in face value for online trades but they have a $10 minimum. Vanguard charges $2 per per $1,000 in face value unless you qualify for reduced pricing when you have $500k or above with Vanguard. Again the prices the brokers quote to you can include a markup or markdown. So the commission isn’t the only story. For instance, TD Ameritrade doesn’t charge an explicit commission on secondary CDs but based on a report from a TD Ameritrade customer, the fees included in the quoted price of a secondary CD was as much as $10 per $1,000 in face value, versus a commission of $1 or $2 per $1,000 at Fidelity or Vanguard.