The 3 Best Short-Term Bond Funds to Buy Now

Conventional wisdom says that short-term bond funds are a smart fixed-income choice in rising-interest-rate environments. Interest rates and bond prices generally move in the opposite direction, and longer maturities typically have steeper price declines than shorter ones.

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In other words, short-term bond funds have lower interest-rate sensitivity than those with longer average maturities or duration.

Also, the Federal Reserve just officially announced the end of its bond buying program. Although the Fed reiterated its plan to maintain its benchmark short-term rate near zero “for a considerable time” and most economists predict it won’t raise that rate before mid-2015, the best time to make investment moves accordingly may be now.

If you haven’t already begun rotating out of long- and intermediate-term bond funds and into short-term bond funds, now is as good of a time as any in the past two years to make your move.

Here are 3 of the best-performing short-term bonds to buy now:

Best Short-Term Bond Funds: Fidelity Limited Term Bond Fund (FJRLX)

Best Short-Term Bond Funds: Fidelity Limited Term Bond Fund (FJRLX)Fidelity Limited Term Bond Fund (FJRLX) kicks off our top choices of short-term bond funds with a solid combination of above-average returns and below-average expenses, along with a credit quality for the portfolio that is above investment-grade.

While the presence of lower-credit-quality bonds in the portfolio can be a drag on performance in bear markets (FJRLX had a -6.9% return in the bear of 2008), this fund’s five- and 10-year annualized returns are better than at least 90% of short-term bond category peers. The low expense ratio of 0.45% is also crucial for competitive returns in the short-term bond space.

If you plan to hold a short-term bond fund for more than a few years, Fidelity Limited Term Bond Fund can be a good choice. But if you are looking for a fund that will give you a smoother ride in shorter periods, take a look at our other two choices.

For an initial purchase minimum, you can get into FJRLX with $2,500.

Best Short-Term Bond Funds: Vanguard Short-Term Investment Grade (VFSTX)

Best Short-Term Bond Funds: Vanguard Short-Term Investment Grade (VFSTX)

As you’ll continue to see, to be among the best short-term bond funds, you must have more than just AAA-rated Treasuries, and expenses must be low. Continuing in this theme, Vanguard Short-Term Investment Grade (VFSTX) is another outstanding fund with above-average performance and below-average expenses.

What makes this Vanguard choice a standout is its added exposure to corporate bonds, which make up nearly 60% of the portfolio compared to the category average which is near 35%. Although yields are not often the primary motivator to buy a short-term bond fund the yield for VFSTX is an impressive 1.93%.

Combined with the fund’s rock-bottom expense ratio of 0.2%, the corporate exposure provides a headwind to returns. Performance ranks are better than at least 75% of category peers for the one-, three-, five- and 10-year periods.

The minimum initial investment for Vanguard Short-Term Investment Grade is $3,000.

Best Short-Term Bond Funds: Janus Short Term Bond (JSHNX)

Best Short-Term Bond Funds: Janus Short Term Bond (JSHNX)

Like our other top-performing short-term bond funds, Janus Short Term Bond (JSHNX) accomplishes its above-average returns with low expenses and a smart range of credit quality and a strong weighting in corporate bonds.

What makes JSHNX stand out is its 10-plus consecutive years of producing positive returns, which is helped by the large concentration (more than 90% of holdings) at investment grade quality or higher. In fact, looking back to 2008, when most bond funds had low to negative returns, Janus Short Term Bond gained 4.6%, which is 8.9% above the short-term bond category average.

Past performance is no guarantee of future results but this fund’s lead manager, Darrell Watters, has led the JSHNX team since 2007 and has been with Janus since 1993. Watters also co-manages another Janus standout, Janus Flexible Bond (JAFIX).

Janus Short Term Bond Fund has a low expense ratio of 0.51% and a minimum initial purchase of $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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