Best Bond Funds for 2015

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Buying the best bond funds for 2015 is likely to be just as challenging as it was in 2014.

Corporate BondConventional wisdom in the fixed income world says, when interest rates are rising, you shift away from longer maturities and toward shorter maturities. But guessing the direction of interest rates has been a losing game for the majority of bond fund managers in the past year.

Indeed, 2014 was supposed to mark the beginning of higher interest rates and the end of a 30-year bull market for bonds. But that event did not transpire and the “great rotation” from bonds into stocks was not so great, to say the least.

Defying almost every prediction, long-term bond funds were big winners in 2014, and the majority of bond funds were losing to the Barclays Aggregate Bond Index year-to-date through December 1.

Will interest rates finally begin their march upward in 2015? That’s the biggest question lingering as we begin a new year.

With that uncertainty in mind, here are three ideas for the best bond funds for 2015.

Best Bond Funds for 2015: Vanguard Total Bond Market Index (VBMFX)

VanguardEven the smartest bond fund managers can lose to their benchmark index in challenging markets, which is why a solid, low-cost, passively-managed bond fund like Vanguard Total Bond Market Index (VBMFX) can be your best bet for an uncertain and volatile 2015.

If the past few months provide any clues for the 2015 bond market, VBMFX is looking like a winner. For the past three months, performance for the Total Bond Market Index ranks ahead of 83% of all bond funds in the intermediate-term category.

Speaking of intermediate-term bond funds, they can be a smart tool for playing the middle ground between long-term bonds, which will lose big in a rising interest rate environment, and short-term bonds, which will yield almost nothing if rates don’t change much.

The expense ratio for VBMFX is a cheap 0.20% and the initial purchase minimum is $3,000.

Best Bond Funds for 2015: Dodge & Cox Income (DODIX)

Dodge & Cox Mutual funds 401(k)The only way to beat the index in challenging bond market environments is to put your money in the hands of an outstanding management team. For this reason, Dodge & Cox Income (DODIX) may be one of the best bond funds for 2015.

Also, if you put faith into the capitalist idea that “the crowd is always right,” you’ll be interested to know that Dodge & Cox Income is among the few bond funds to benefit most with increased inflows in the wake of Bill Gross’ exit from PIMCO.

Judging by past performance, the crowd did get it right. Performance ranks for DODIX are comfortably in the top third to top quartile for the one-year, three-year, five-year, 10-year and 15-year returns compared to peers in the intermediate-term category.

As a nice bonus, the TTM yield for Dodge & Cox Income is a healthy 2.98%.

The expense ratio for DODIX is a low 0.45% and the initial purchase minimum is $2,500.

Best Bond Funds for 2015: Loomis Sayles Bond (LSBRX)

To be sure, 2015 looks to be a year where only the best fund managers will be successful in beating their respective benchmark indices. Perhaps the best, most experienced bond fund manager in the world today is Dan Fuss, and his go-anywhere, multi-sector bond fund, Loomis Sayles Bond (LSBRX) can be an outstanding choice for investors willing to take on extra market risk.

Loomis Sayles 185Fuss has been managing bonds for more than 50 years, and he has the track record to prove he has learned from that rich experience. LSBRX has outperformed the Barclay’s Aggregate Bond Index in eight of the past 10 calendar years, and the fund easily ranks in the top quartile among multi-sector bond funds in every time period you care to analyze from the 1-year return all the way through the 15-year return.

This performance is accomplished by holding a healthy portion of high-yield bonds. The average credit quality for the bond holdings in LSBRX is just below investment grade at BB. This quality contributes to the nice 30-Day SEC yield of 2.7% but also makes for potentially steep declines in price in economic recessions.

For example, in the depths of the last bear market, in 2008, LSBRX fell -22.1%. In 2009, the fund bounced back strongly with a gain of 36.8%. But if you are a long-term investor, especially one who believes the a go-anyhwere style is just the flexibility needed to navigate these unpredictable times in fixed income, you are likely to be happy with Loomis Sayles Bond.

The expense ratio, at 0.91%, is near-average for a multi-sector bond fund and the initial purchase minimum is a reasonable $2,500.

As of this writing, Kent Thune did not hold a position in any of the aforementioned securities. Under no circumstances does this information represent a recommendation to buy or sell securities.

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