When choosing the best bond funds for clients, I like to start with a solid core fund that I can hold for the long-term.
Although tactical plays in the short-term can be smart from time to time, I’ve found that looking out a decade and beyond is wise. For example, if you pay much attention to capital markets, you may have noticed that the bond market can be more complex and even more difficult to forecast from a month-to-month or year-to-year basis than stocks.
Even some of the best fixed-income portfolio managers in the world miscalculated the timing of higher interest rates over the past three to five years. The famous fall of bond king Bill Gross back in 2014 was preceded by massive outflows arising from his missed call on rising rates, which still hasn’t materialized as of this writing.
So when you want to find the best bond funds to buy for your own portfolio, you’re wise to focus most or all of your attention on the bond funds built for the long-term, such as these three funds:
Best Bond Funds for the Next Decade: Vanguard Intermediate-Term Bond Index (VBIIX)
Expenses: 0.16%, or $16 per $10,000 invested annually
Minimum Initial Investment: $3,000
For just the right combination of low costs and a diverse mix of bonds that can perform well over the next decade, the Vanguard Intermediate-Term Bond Index (MUTF:VBIIX) is one of the best bond funds for the job.
Short-term bond funds typically average low single-digit returns and low yields; long-term bond funds could perform and yield well over the next decade, but rising interest rates could keep returns relatively lower; therefore, intermediate-term bond funds could be the “sweet spot” of fixed income in the next ten years.
VBIIX also has a good balance of credit quality, averaging at investment grade, which also provides that just right mix of low-, medium- and high-yielding bonds for decent income and returns.
Although the next decade won’t look exactly like the last one, the 10-year annualized return of 5.9% for VBIIX beats more than 90% of the funds in the intermediate-term bond category.
Best Bond Funds for the Next Decade: PIMCO Real Return Asset D (PRTDX)
Expenses: 0.95%
Minimum Initial Investment: $1,000
Inflation was historically low over the last decade, but it’s almost certain to average higher over the next ten years, which makes PIMCO Real Return Asset D (MUTF:PRTDX), one of the best bond funds to buy now.
PRTDX holds treasury inflation-protected securities, also known as TIPS, which offer protection against inflation by linking interest payments and principle values to the inflation rate. Put simply, if the cost of living averages higher over the next decade than the previous decade, TIPS funds could be smart holdings.
PRTDX is one of the best TIPS funds, as measured by its 5.7% 10-year annualized return, which is significantly ahead of category averages and the Barclays U.S. Aggregate Bond Index.
Best Bond Funds for the Next Decade: Loomis Sayles Bond Retail (LSBRX)
Expenses: 0.89%
Minimum Initial Investment: $2,500
If you’re looking to boost returns while juicing yields in your fixed income portfolio, Loomis Sayles Bond Retail (MUTF:LSBRX) is one of the best bond funds on the market, especially among the no-load fund offerings.
Other than high yields and potential for benchmark-smashing long-term returns, shareholders of LSBRX get a solid bond fund managed by Dan Fuss, who has over 50 years of experience in the world of fixed income. And if Mr. Fuss decides to retire in the next decade, he has wisely built a team of managers that can continue his tactical but smart style for decades to come.
Its go-anywhere style has LSBRX holding a wide range of bond types that lean toward corporate bonds, such as top holdings Intel Corporation (NASDAQ:INTC), Ford Motor Company (NYSE:F), and Bristol Myers-Squibb Co (NYSE:BMY) and a balance of higher yielding bonds.
One caution for potential buyers of LSBRX is that the high yields and high potential for long-term returns come with risk for significant short-term declines in price when economies and markets are weak.
As of this writing, Kent Thune did not hold a position in any of the aforementioned securities. However, he holds LSBRX in some client accounts. Under no circumstances does this information represent a recommendation to buy or sell securities.
