After stabilizing at historic lows, bond rates are rising. Rising interest rates are also an opportunity for retirees and passive income investors to start exploring the best performing bond funds to preserve their wealth. But, like any type of ETF or mutual fund, bond funds require a bit of investigation before making an investment. Namely, you want to make sure the fund is structured to meet your expectations.
Bond funds offer a lot of stability and the allure of steady income, but not all bond funds are the same. They vary widely depending on the type of bonds held by the fund, its objectives and strategies for managing the fund, and even the changing nature of the bond market. To this end, it is not always easy to identify the best performing bond funds through objective analysis.
Here’s a closer look at bond funds in 2022, including the most reliable funds based on rolling yields and their expected performance in the current rising rate environment.
Why invest in bond funds?
The objective of a bond fund is primarily to generate a steady stream of income through the interest payments generated by the bonds. Bond funds offer a simple alternative to building your own bond portfolio. For example, instead of building a bond ladder that guarantees cumulative monthly payments, an investor can invest in a bond fund that will offer the same level of payment.
The other case in which a bond fund is useful is as a portfolio hedge. Investors looking to bring stability to an equity-focused portfolio can invest in a bond ETF. It’s a way to hedge against volatility, as well as create passive investment income that someone can reinvest in stocks.
Bond ETFs vs Bond Mutual Funds
Like equity funds, bond funds come in both ETFs and mutual funds. For most investors, the decision comes down to fund performance versus expense ratio. Bond funds generally have a lower expense ratio than equity funds, but a level of active management is still required to ensure they perform as intended.
The type of bonds you are interested in can also have an effect on the type of fund you choose. Those interested in US Treasuries, corporate bonds, and even municipal bonds will find both ETFs and mutual funds accessible. Those looking for riskier investments like foreign bonds or bonds from subprime issuers will want to look to ETFs, as most mutual funds will stick to safer investments.
The best performing bond ETFs
The appeal of many bond ETFs is that it is easy to enter and exit positions, giving bond investors the flexibility to seek the best return. That, and there are generally no minimum investments for ETFs. Here is an overview of the best performing bond funds in this category:
- Municipal Bond ETF without AMT Invesco National (PZA) is continuously rebalanced to optimize yield and averages around 2.3% per month on municipal bonds.
- iShares Core 1-5 Year USD Bond ETF (ISTB) protects against interest rate risk by holding short-term bonds at an ultra-low spend rate of 0.06%.
- Pimco Active Bond ETF (BOND) includes corporate and municipal bonds, as well as emerging market bonds, to produce an average yield of 2.53%.
- VanEck Vectors Fallen Angel High Yield Bond ETF (ANGL) is a junk bond ETF that manages an impressive average yield of 3%.
- Vanguard Tax-Exempt Bond ETF (VTEB) has an extremely low expense fee of 0.06% and a respectable monthly return of 1.83%, on average.
- Vanguard Total International Bond ETF (BNDX) focuses on foreign bonds, particularly investment grade bonds denominated in foreign currencies.
The Best Performing Bond Mutual Funds
Investors looking for a managed bond investment will find it in bond-focused mutual funds. Many of these funds outperform ETFs on the surface; however, they come with higher expense ratios that can make these investments a horse each. Here are some of the top performers:
- BNY Mellon Bond Market Index Fund (DBIRX) is a short-term bond fund with an average return of 1.85%. It requires a minimum investment of $1,000.
- Fidelity Total Bond Fund (FTBFX) tracks domestic and foreign bonds for broad exposure. This fund has an expense ratio of 0.45%, but an average return of 2.28%.
- Northern Trust Bond Index (NOBOX) requires $2,500 to invest and has an impressive average return of 2.13%. Its expense ratio is 0.15%.
- Schwab US Aggregate Bond Index Fund (SWAGX) has the lowest spend ratio on this list (0.04%) and an average of 1.95%. It is also the youngest fund on the list, created in 2017.
- T. Rowe Price QM U.S. Bond Index Fund (PBDIX) has a minimum investment requirement of $2,500. Investors should expect a return of 1.92% and a fee of 0.25%.
- Vanguard Total Bond Market Index Fund (VBTLX) requires a minimum investment of $3,000 but has almost no expense ratio (0.05%). It averages 1.95% per month.
A smart way to maintain retirement income
For retirees and investors who rely on bonds for regular income, fund performance is very important. To that end, it’s important to carefully select funds that have a track record of returns, strong managers at the helm, and strategies for adapting to the bond market itself.
Want more tips on investing in bond funds with confidence? Discover the best investment newsletters to get the inside scoop on bond funds and expert picks. You’ll learn not only how to identify the best-performing bond funds, but also what to expect as the bond market continues to take shape in 2022 and beyond.