Investors fled equities for bonds recently, so bonds of varying credit quality and duration are now relatively expensive. This makes it tough for investors to select a corner of the bond market to which they should allocate new money. At times like this, it makes sense to buy them all.

A Shotgun Instead of a Rifle

Global central banks have maintained an accommodative posture for the better part of three years, a decision that’s made it increasingly difficult for investors to find attractive corners of the bond market.  In this environment, yield-starved investors have turned to dividend-paying equities for income.

It’s a sensible strategy; we certainly agree with the decision to underweight bonds in today’s market. Yet bonds remain a cornerstone of a diversified portfolio, and should still be represented in your asset mix. 

It’s tough to find much value in individual sectors of bond market at the moment, so an all-encompassing exchange-traded fund (ETF) such as Vanguard Total Bond Market ETF (NYSE: BND) is the best way to add fixed-income exposure to your portfolio. This ETF tracks the Barclays Capital Aggregate Bond Index, the world’s most popular bond benchmark. The fund holds a mix of US Treasuries, corporate bonds and mortgage-backed bonds, as well as some foreign issues–a mix that provides a snapshot of the overall bond market.

Although the fund holds a sizable slug of long-dated bonds—about one-third of the fund’s assets feature maturities of more than 20 years—its mix of shorter-term bonds brings the portfolio’s average maturity down to 7.4 years.

The fund’s average duration is currently 5.2 years, which means that the value of the portfolio can be expected to decline by 5.2 percent in response to a 1 percent increase in interest rates. But duration risk isn’t a major concern right now due to the Federal Reserve’s recent pledge to maintain its accommodative interest rate policy through 2013. Because an interest rate bump doesn’t seem to be in the cards in the near future, it makes sense to extend duration and realize a more attractive yield. At present, this ETF yields 3.2 percent.

In addition to an attractive yield, the fund features a low expense ratio of 0.11 percent. Schwab US Aggregate Bond (NYSE: SCHZ) is the only total market bond ETF that’s cheaper at 0.10 percent. However, the Schwab offering launched in July and this newcomer has yet to establish significant trading volume.

This ETF is suitable for general investors. However, more sophisticated bond investors can also use it as a core holding. But bond-investment mavens should still round out their portfolios by allocating to the sectors of the bond market—such as Treasury Inflation Protected Securities and municipal bonds—that aren’t represented in this fund’s portfolio. Regardless of which camp you fall into, this ETF is an excellent tool for adding fixed-income exposure to your portfolio without having to worry about relative valuations.