When my clients, friends or readers ask, “Which are the best bond funds to buy now?” the answer always begins with two words – it depends.
Bond mutual funds have several purposes, and we may come closer to an answer by breaking these purposes into three primary categories — short-term investing, long-term investing and income. Today’s list will highlight a bond fund from each of these categories.
Other factors in choosing the best funds at any given moment tend to hinge upon prevailing economic conditions. For example, if the job market is eroding and inflation appears tame, the Federal Reserve is likely to continue its lower-for-longer rate policy, which could then put downward pressure on yields and upward pressure on prices — not good for income investors but good for long-term investors.
So no matter your objective, one of these three bond funds is likely to suit your needs right now.
Best Bond Funds to Buy Now: Vanguard Short-term Bond Index (VBISX)
Expenses: 0.16%, or $16 per $10,000 invested annually
Minimum Initial Investment: $3,000
SEC Yield: 1.1%
If you’re looking for the best bond fund to hold for a period of less than one year, Vanguard Short-term Bond Index Fund (MUTF:VBISX) is an outstanding choice.
There are a few good reasons to buy short-term bond funds. One is to minimize the risk of losing principle in an economic environment where rising interest rates is possible. Bond prices generally move in the opposite direction as interest rates, and the longer the maturity of the bond holdings, the greater the risk.
Another good reason to buy short-term bond funds is to use them as an alternative to money market funds, which are yielding almost zero now. Although bond mutual funds can lose value, the low relative market risk may be worth getting yields above one percent.
The rock-bottom expense ratio of 0.16% for VBISX is also an advantage for investors looking to squeeze out every ounce of return and yield they can get in the current low-yield environment.
The portfolio consists primarily of U.S. Treasury bonds, which provides the stability and low relative market risk needed for short-term investing periods.
Best Bond Funds to Buy Now: Dodge & Cox Income (DODIX)
Minimum Initial Investment: $2,500
SEC Yield: 2.6%
Long-term investors looking for a combination of yield and return that can stay ahead of the benchmark index will like what they see in the Dodge & Cox Income Fund (MUTF:DODIX).
When looking for one solid bond fund to hold for the long term, index funds can be smart but you’re likely to get more out of an actively managed fund with a history of staying ahead of the averages.
DODIX is ahead of the benchmark index, Barclays Aggregate U.S. Bond Index, for the one-, three-, five- and 10-year returns. Its SEC yield of 2.6% also beats the index, which is yielding a lower 1.74%, as measured by iShares Core U.S. Aggregate Bond Index (NYSEARCA:AGG).
The DODIX portfolio consists of a diverse mix of bond types, with the largest portion being intermediate-term corporate bonds of large company issuers like Bank of America Corp (NYSE:BAC) and Verizon Communications Inc. (NYSE:VZ).
Best Bond Funds to Buy Now: Vanguard High-Yield Corporate Fund (VWEHX)
Minimum Initial Investment: $3,000
SEC Yield: 4.73%
The potential for a weakening economy currently makes investing in junk bonds a risky wager, which means the best bond funds to buy now for investors seeking income are those like the Vanguard High-Yield Corporate Fund (MUTF:VWEHX).
Investors seeking high yields can certainly find bond funds yielding higher than the 4.73% yield of VWEHX, but high-yield bond funds can see significant price declines in weak markets, and now is arguably not the time to bet big on junk.
VWEHX does hold junk bonds but they’re not quite as junky, if you will, as the funds currently earning higher yields. The management team for VWEHX seeks to hold medium-to-lower-quality bonds, which is to say that they attempt to achieve decent yields while minimizing principal loss.
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.