Investing in bond funds is usually not exciting. But then again, in today’s volatile world, investment in a bond ETF with reliable returns can be a comfort.
Bond investment can be a excellent way to stabilize your portfolio. Bond funds and ETFs during the 2008 financial crisis performed well. Keep in mind that during that tough year the Barclays Capital U.S. Aggregate Bond Index returned 5.24% to investors. During this time, the S&P 500 fell a staggering 37%.
However, the bond market has many flavors – and also risk levels. So here’s a look at some of the top:
Vanguard GNMA Bond Fund
The word “mortgage” can be scary to many investors. But the fact is that a mortgage can be good a investment – especially if the mortgage bond funds focus on good credit quality.
This is certainly the case with the Vanguard GNMA (MUTF: VFIIX) bond funds, which has $35.3 billion in assets. Much of the portfolio is in Ginnie Maes. And yes, these are backed by the U.S. government. There are also investments in Treasuries as well as positions in some Fannie Mae and Freddie Mac issues.
But there are still some risks. Perhaps the most significant is prepayments from the mortgages. This generally happens when rates fall. In other words, there will be a lower return on the portfolio.
The good news is that the Vanguard GNMA has been skillful in dealing with prepayment risk. At the same time, the fund’s low expense ratio – at 0.23% — gives returns a boost for this bond investment.
PIMCO Real Return (PRTNX)
A terrible enemy of bonds is inflation. Because bonds, bond funds and bond ETF investments generally provide a fixed amount of income, there will be less purchasing power from these cash flows when the value of the dollar falls. In light of the budget deficits and commodity surges, it is reasonable that there will be higher inflation over the long haul.
But there are various bond investments that adjust their value for inflation, such as Treasury Inflation Protected Securities. And one of the top mutual funds in the sector is the PIMCO Real Return (MUTF: PRTNX) fund, which has $18.9 billion in assets.
Interestingly enough, the fund has much flexibility. For example, it will use exotic investments like futures and forward contracts. There are even positions in other countries, with a big position in Brazil.