12 Best Performing Bond Funds With High Yields


A bright side to this year’s hard sell in the bond market is that, thanks to rising yields, bond fund investors now have many more options when looking to add income and total return potential. fixed income portfolios.

Consider that the mid-to-mid-term core bond fund is now yielding 3.58%, according to Morningstar Direct, compared to just 1.24% at the end of September 2021.

Even though bonds have dealt a heavy blow to investors’ portfolios, failing to fulfill their usual role of offsetting stock market declines, they still play an important role in a diversified portfolio and yield is one of their key benefits.

To find high-yield, quality bond funds, we looked to select from Morningstar analyst-covered bond funds with a bronze, silver, or gold analyst rating. Using each fund’s oldest share class, we looked for funds that are performing above average for their category and also performing above average year-to-date and course of the last three years.

Comparing the statistic known as the SEC yield is the easiest way to compare bond fund returns, but the metric is not a guarantee of future earnings. The SEC yield calculation is based on a 30-day period ending on the last day of the previous month. It represents the hypothetical income an investor would earn from the fund over a 12-month period if the fund continued to earn at the same rate as the 30-day calculation period.

To keep the list manageable, we’ve focused on the four main categories of Morningstar bond funds: core mid-term bond funds, core mid-term bond funds, short-term bond funds, and high-yield bond funds. .

Here are the funds that crossed the screen:

  • Fidelity Investment Grade Bond FBNDX
  • Fidelity Intermediate Bond FTHRX
  • SPDR Portfolio Aggregate Bond ETF SPAB
  • Fidelity Total Bond Fund FTBFX
  • TIAA-CREF Core Plus Bond TIBFX
  • Loomis Sayles Investment Grade Bond LSIIX
  • Baird BSBIX Short Term Bond Fund
  • Fidelity FSHBX Short Term Bond
  • FPA New Income FPNIX
  • BrandywineGLOBAL High Yield BGHSX
  • Hotchkis & Wiley HWHIX High Yield
  • PGIM HYSZX Short Duration High Yield Income

Does higher return mean higher risk?

It is important for investors to remember that there can also be a trade-off with yield. While bond fund income levels are higher than they were a year ago thanks to rising interest rates, some managers are increasing yields even further by adding riskier bonds to their portfolios. , such as more bonds with lower credit quality than their peers and securitized credits. These obligations could be secured by commercial or residential mortgages, car loans or even credit card debt.

Investors can assess the credit quality of any bond fund by comparing it to other funds using the Morningstar Fixed-Income Style Box, which plots credit quality and interest rate sensitivity of a fund.

Investing in riskier stocks has had mixed results lately. Recession fears weighed on high-yield corporate bond yields for most of the year, and securitized credit performance was hurt as higher interest rates undermine borrowers’ ability to make interest payments.

“It matters where managers take their risks,” says Morningstar analyst Chiayi Tsui. Tsui adds that even if funds take on more credit risk, they can balance that out by reducing the fund’s sensitivity to changes in interest rates, another major variable for bond funds.

Here is an overview of the funds that crossed our screen.

Best Performing Mid-Term Core Bond Funds

Mid-term core bond funds occupy a central position in most diversified portfolios. These are generally moderate investment strategies, and although managers should stay within category limits, investing primarily in higher quality government and corporate bonds, there are higher yielding options.

While the average mid-tier core bond had a yield of 3.58% as of September 30, Fidelity Investment Grade Bond posted a SEC yield of 4.39%. “The fund took on more credit risk,” said Mike Mulach, senior manager research analyst at Morningstar.

Comparison of two loyalty funds and their interest rate sensitivity and credit quality

Fidelity Intermediate Bond offers one of the highest yields in the category at 4.05%. According to Morningstar manager research analyst Saraja Samant, the fund is “more exposed to corporate bonds which generally yield more than Treasuries.”

The Fidelity Intermediate Bond fund has outperformed most core mid-term bond funds this year. Mid-term bonds lost 10.34% through Oct. 31, compared to the average decline of 15.86% in the core mid-term bond fund. According to Samant, “the fund has a shorter duration in the category, which means that its sensitivity to changes in interest rates is lower than that of most funds in the category”.

Table of the highest-yielding core mid-term bond funds

Mid-term core-plus bond funds have broader mandates than the bond funds that Morningstar classifies as mid-term core-plus bonds. Funds in this category can venture further into the riskier corners of the bond market by earning higher yields. The mid-to-mid-term core-plus bond fund returned 4.07% as of September 30.

TIAA CREF Core Plus Bond performed above the fund average with a SEC yield of 4.53%. Morningstar’s Tsui states that “the fund’s performance has been somewhat higher than that of its typical rival since the start of 2020”. Managers are “sourcing a bit more for emerging markets,” she says. “This 10.2% stake in emerging market debt, however, is almost 4 times the median of peers in the category, and about half of it is rated below investment grade,” a- she wrote in a report published in February.

Managers balanced riskier allocations with shorter interest rate bets. “These allocations represent increased credit risk, but the strategy’s return (an indicator of risk) has come quite close to the peer median over the past two years, indicating a reasonable level of risk taking,” she writes.

Chart of Core Plus Mid-Term Mutual Funds and Best Performing Exchange Traded Funds or ETFs

Short Term Bond Funds

Short-term yields have risen the fastest over the past year. A year ago, the average short-term bond fund was returning just 0.90%, but as of September 30, the average was 3.75%. This was slightly higher than what the average core mid-term bond fund offered.

Morningstar’s Samant says that’s no surprise given the Fed’s interest rate hike, which most directly affects short-term bonds. Samant says short-term yields should stay higher until the Federal Reserve pivots and starts cutting rates, giving investors a rare opportunity to earn higher yields while controlling interest rate sensitivity. interest. (While the Fed’s actions directly affect short-term bonds, the prices of longer-term bonds have greater swings with changes in interest rates.)

Baird Short-Term Bond had one of the highest yields in the category at 4.05% as of September 30. “When the team wants to add credit risk, they prefer well-traded corporate bonds or high-quality securitized credit,” he writes. The Gold-rated fund has outperformed this year, losing only 4.97% compared to the average decline for short-term bond funds of 6.60%.

Table of the highest paying short-term bond funds

High Yield Bond Funds

High yield bond funds offer the most yield of any bond class, and Brandywine Global High Yield is one of the highest. The fund reported an SEC yield of 8.52% as of September 30, well above the 7.38% of average high-yield funds.

And in a similar dynamic to other funds that have outperformed this year, PGIM Short Duration High Yield Income has balanced higher returns with less interest rate sensitivity this year. The fund has lost only 6.52% this year, while the average high yield fund is down 11.51%.

Table of Top Performing High Yield Bond Mutual Funds and Exchange Traded Funds


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