These Bond Funds And Bond ETFs Are Now Among Your Best Choices

Summary

• Investors may be asking themselves if bond fund or bond ETF returns are going to collapse in light of recent interest rate rises.
• But since future bond market performance is extremely difficult to predict, investors, if they continue to hold such funds, should consider investing only in funds with the most favorable characteristics.
• I have done a highly extensive search of bond funds and ETFs from 7 categories in order to identify these funds in addition to my previously "Recommended Funds".
• For investors who want to consider which categories of funds may offer the best prospects right now, I briefly discuss which categories these may be.

With interest rates have risen over the last six months, especially since the beginning of this year, as you can see in this chart showing the 10-year U.S. Treasury yield, you may be asking yourself whether bond funds and bond ETFs, which generally had been doing so well until the start of the year, are beginning to collapse. Since bond returns are inversely related to yields, rising rates mean that while dividend payments may be going up, total returns may wind up going down. In fact, since the beginning of the year, many popular bond funds have gone down more than 2%.

Of course, bond funds don't typically do as well as stock funds over the long term and will vary considerably depending on a particular bond fund's category. But the most widely owned bond fund category, intermediate term funds, often called "core" funds, have generally averaged more than 6% annualized over the last two years. Not bad, especially as compared to money market funds which barely returned more than 1%.

But just as for stocks, future bond fund performance is very hard to predict. Therefore, rather than trying to guess which way interest rates will now be headed, it makes sense to merely try to invest in the best bond funds one can find based on a variety of important criteria. But searching out such bond funds can be tedious. So, in this article, I have done my best to simply the process for investors.

As investors, we have no control over whether rates will continue to go up or down from here, or to stabilize. But we do have control over which bond funds we select, and therefore, we should pay considerable attention to not only which funds have shown among the best performances within their category, but also to other favorable characteristics. These include the fund manager having been at the helm for at least 5 years (or nearly so) and an expense ratio of no more than 1.00%, while avoiding investing in funds with a high-risk bond portfolio. Finally, these funds should be open to new investors and investors should have to pay no more than 5K to open them. (These characteristics can usually be identified at the Morningstar.com website. Of course, if a fund is passively managed, manager tenure would not be relevant.)

And, when we look back at previous periods when most bond funds slumped, it should make sense to favor funds that did better than their category competitors during that slump. What such data may suggest is that, if or when there is an upcoming period of relatively poor returns (as may have already begun), these funds may hold their value better than funds that, in the past, did not.

I have previously presented my "Recommended Funds" in a December, 2020 article on my website. While these funds have done well down through many years, this is not to suggest that they have beaten out all other funds. Thus, there are many other funds that may now be highly worthy of consideration. While this is true, I am not about to drop any of my Recommended Funds when I see funds that have done even better. With thousands of funds available, there are always bound to be funds performing better than your prior selections and one should not chase funds solely because they have had a high level of past performance.

But for investors who are interested in considering some of these additional, highly worthwhile funds which I located after examining hundreds of bond funds and ETFs in most major categories, I have come up with a total of 21 different mutual funds and ETFs that have done as well as or even better than my Recommended Funds over the last 3 years, and have the other favorable characteristics mentioned above. (Although the expense ratios for some may tend to be somewhat high, these funds still managed to outperform my Recommended Funds.)

The tables below show these funds and data on the relevant characteristics I deem most important. I have carefully screened these funds so that anyone who chooses to invest in them should find they prove to be good choices, in addition to, or as replacements for, some of my Recommended Funds. All are currently open to new investors. Each of the seven bond fund categories I've included consists of two mutual funds and one ETF. Returns are annualized as of Feb. 28, 2021.

The last two columns in each table show how each fund performed when overall bond market returns were relatively poor - the two periods actually overlap. The "Recent Short Slump" occurred between 9/1/17 and 10/31/18 (14 months); the "Extended Long Slump" occurred between 10/31/2012 through 10/31/2018 (6 years). During those periods, the Vanguard Total Bond Market Index (VBTLX), a proxy for the entire bond market, dropped -2.10% during the shorter period and gained only +1.29% during the longer period, both annualized.

Intermediate Term Municipal Bonds

Tax-free bonds are usually superior to taxable bonds in a taxable account if your income is moderately high.

Fund Name (Symbol)	3 Year Ann-ualized Ret.	Expense Ratio	Manager Tenure	Min. to Open	Performance During Recent Short Slump	Performance During Extended Long Slump
Hartford Municipal Opportunities A (HHMAX)	4.49%	0.70	9	2K	-0.43	+2.25
USAA Tax Exempt Intermediate-Term (USATX)	4.69	0.48	17	3K	+0.05	+2.32
iShares National Muni Bond ETF (NYSEARCA:MUB)	4.52	0.07	-	-	-1.12	+1.76
Average Fund	4.17	-	-	-	-0.96	+2.03

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Note: My Recommended Fund in this category, VCAIX, 3 yr. return is 4.24

Intermediate Core Plus

Fund Name (Symbol)	3 Year Ann-ualized Ret.	Expense Ratio	Manager Tenure	Min.to Open	Performance During Recent Short Slump	Performance During Extended Long Slump
Wells Fargo Core Plus Bond A (STYAX)	6.57%	0.75	12	1K	-1.76	+2.22
USAA Intermediate-Term Bond (USIBX)	6.46	0.58	14	3K	-1.22	+2.68
Invesco Total Return Bond ETF (NYSEARCA:GTO)	7.03	0.50	5	-	+0.25	NA
Average Fund	5.38	-	-	-	-3.46	+1.91

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Notes:1. My Recommended Fund in this category, PTTRX, 3 yr. return is 5.45.

2. Returns for Average Fund are an estimate.

Intermediate Core

Fund Name (Symbol)	3 Year Ann-ualized Ret.	Expense Ratio	Manager Tenure	Min.to Open	Performance During Recent Short Slump	Performance During Extended Long Slump
Fidelity Investment Grade Bond (FBNDX)	6.32%	0.45	16	0	-1.98	+1.53
Aberdeen Total Return Bond A (BJBGX)	5.88	0.69	6	1K	-2.89	+0.99
FlexShares Core Select Bond ETF (NYSEARCA:BNDC)	5.37	0.35	4+	-	-2.59	NA
Average Fund	5.14	-	-	-	-2.20	+1.18

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Note: My Recommended Fund in this category, VBTLX, 3 yr. return is 5.33.

High Yield

Fund Name (Symbol)	3 Year Ann-ualized Ret.	Expense Ratio	Manager Tenure	Min.to Open	Performance During Recent Short Slump	Performance During Extended Long Slump
PGIM High Yield A (PBHAX)	6.65%	0.80	13	1K	+1.94	+5.28
Diamond Hill High Yield A (DHHAX)	9.72	0.96	6	2.5K	+4.07	NA
SPDR Portfolio High Yield Bond ETF (NYSEARCA:SPHY)	6.32	0.15	-	-	-1.58	NA
Average Fund	5.06	-	-	-	+0.62	+4.56

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Note: My Recommended Fund in this category, VWEHX, 3 yr. return is 6.10.

Short Term

Fund Name (Symbol)	3 Year Ann-ualized Ret.	Expense Ratio	Manager Tenure	Min.to Open	Performance During Recent Short Slump	Performance During Extended Long Slump
PIMCO Low Duration Income A (PFIAX)	4.09%	0.95	5	1K	+1.76	+3.07
Thornburg Limited Term Income A (THIFX)	4.52	0.77	14	5K	-0.26	+1.58
iShares 1-5 Year Invmt. Grd. Corp Bd. ETF (NASDAQ:IGSB)	4.56	0.06	-	-	-0.30	+0.74
Average Fund	3.36	-	-	-	-0.12	+1.48

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Note: My Recommended Fund, VFSTX in this category, 3 yr. return is 4.06.

International

Fund Name (Symbol)	3 Year Ann-ualized Ret.	Expense Ratio	Manager Tenure	Min.to Open	Performance During Recent Short Slump	Performance During Extended Long Slump
DFA World ex US Gov-ernment Fxd. Inc I (DWFIX)	4.83%	0.20	9	0	+2.07	+3.65
Janus Henderson Developed World Bond A (HFAAX)	5.86	0.83	12	2.5K	-0.19	+4.00
iShares Core Inter-national Aggt Bd ETF (BATS:IAGG)	4.46	0.08	-	-	+1.63	NA
Average Fund	4.38	-	-	-	+0.23	+3.31

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Note: My Recommended Funds in this category, PFRAX and VTABX, 3 yr. returns are 4.44 and 4.34, respectively.

Inflation

Fund Name (Symbol)	3 Year Ann-ualized Ret.	Expense Ratio	Manager Tenure	Min.to Open	Performance During Recent Short Slump	Performance During Extended Long Slump
DFA Inflation-Protected Securities I (DIPSX)	6.40%	0.11	14	0	-1.95	-0.41
Fidelity Inflation-Prot Bd Index (FIPDX)	6.40	0.05	6	0	-1.45	-0.31
SPDR Portfolio TIPS ETF (NYSEARCA:SPIP)	6.05	0.12	-	-	-1.68	-0.45
Average Fund	5.41	-	-	-	-1.65	-0.45

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Note: My Recommended Fund in this category, VIPSX, 3 yr. return is 6.09.

Which of These Fund Categories Now Have the Best Prospects?

Future economic factors will affect bond fund performance. As a result, it is extremely difficult to predict which bond funds and/or ETFs will stand out from the crowd. Such a calculation seems to be even more difficult than usual due to the uncertainty of when the disruptive effects of the coronavirus will pass and whether huge amounts of Congressional and Federal Reserve stimulus will cause rising inflation, which would likely hurt most bond funds. And if interest rates rise, money market funds may start to create more competition again for investors' non-stock investments.

In light of these uncertainties, it may be best to pick from at least several of the above categories for your bond investments.

Notice that the above categories currently exclude long-term bond funds. With interest rates still near historic lows, the chances are that an unpleasant rise in rates will, as always, hurt longer term bonds more than shorter term ones. However, it should also be noted that most inflation-protected bond funds have portfolios that can be considerably hurt as US treasury rates go up. (One fund that has a more limited interest rate sensitivity is Vanguard Short-Term Inflation-Protected Securities Index Fund (VTAPX). or its ETF version (VTIP)).

Other good choices are to invest in funds that have a corporate bond focus as opposed to government bonds. Finally, High Yield bonds, being positively correlated with stocks, will likely depend for success on whether stocks can keep going up.

Analyst’s Disclosure: I am/we are long VBTLX, VCAIX, PTTRX, VWEHX, VFSTX, PFRAX, VTABX, VIPSX, VTAPX. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.