The best short-term bond funds


It has been a difficult year for bond investors. As of this writing, the Morningstar US Core Bond Index, a gauge of the broader bond market, is down nearly 10% for the year so far. Stubbornly high inflation and rising interest rates have contributed to what many are calling the historic bond bear market.

Should bond investors look to shorter-dated bonds, which are less affected by interest rate changes than longer-dated bonds?

Morningstar Director of Personal Finance and Retirement Planning Christine Benz says this decision should be based on your time horizon and when you need to dip into the money, not what’s happening in the market. bond. If you plan to spend those dollars in six to 10 years, mid-term core bond funds are still the place to be despite the current volatility in the bond market, she says. But if you’re saving for a shorter-term goal over the next three to five years, short-term bond funds are better options.

Investors looking for good short-term bond funds should prioritize those with low expense ratios or low fees. Fees eat into returns, so it’s especially important to favor low-cost, short-term bond funds, whose return opportunity is inherently modest.

Here’s Morningstar’s list of the best short-term bond funds and exchange-traded funds to invest in right now.

The 4 Best Short-Term Bond Mutual Funds and ETFs

These funds land in one of Morningstar’s short-term taxable bond categories and earn the highest gold rating from Morningstar analysts for at least one of their stock categories.

  1. Baird BSBIX Short Term Bond
  2. PGIM Short Term Corporate Bonds PSTQX
  3. Vanguard VSTBX VCSH Short Term Corporate Bond
  4. Vanguard Short Term Cash VSBSX VGSH

Here’s a bit more about each of these funds. All data as of June 9, 2022.

Baird Short Term Bond

  • Morningstar Category: Short Term Bond
  • Expense ratio: 0.30%
  • Effective duration: 1.92 years

This actively managed short-term bond fund is led by an experienced team that invests in high-quality corporate and securitized credit bonds, as well as government bonds. The team keeps the fund’s duration (which is a measure of interest rate sensitivity) in line with the Bloomberg US Government/Credit 1–3 Year Index, and it adds value through a selection of sound securities and sector rotation, with a preference for non-government bonds. . That means the fund takes on more credit risk than some other short-term bond funds, but it hasn’t hurt its risk-adjusted returns, notes Morningstar senior analyst Gabriel Denis.

PGIM short-term corporate bond

  • Morningstar Category: Short Term Bond
  • Expense ratio: 0.38%
  • Effective duration: 2.74 years

This actively managed short-term bond fund takes a longer duration approach, aiming to outperform the Bloomberg 1–5 Year Credit Index by 0.60% per annum before expenses. The management team, which is very experienced and thorough, seeks this outperformance through security and sector rotation, and not through excessive duration management. The team focuses on corporate bonds, where it favors A or BBB rated bonds rather than higher quality papers. The fund takes on more credit risk than other short-term bond funds, but its long-term balance sheet is strong compared to other funds in the category, says Morningstar strategist Eric Jacobson.

Vanguard Short Term Corporate Bonds

  • Morningstar Category: Short Term Bond
  • Expense ratio: 0.05% (mutual funds), 0.04% (ETF)
  • Effective duration: 2.77 years

This index fund, available as both a mutual fund and an ETF, tracks the Bloomberg US 1–5 Year Corporate Bond Index, which includes high-quality US corporate bonds with a maturity residual of between one and five years. Like the other funds featured here, this fund bears a fair amount of credit risk. That being said, the fund offers precise market access to high-quality, short-term bonds at a low cost and has proven to be competitive over the long term.

Vanguard Short Term Cash

  • Morningstar Category: Short Government
  • Expense ratio: 0.07% (mutual funds), 0.04% (ETF)
  • Effective duration: 1.91 years

Unlike the other funds included here, Vanguard Short-Term Treasury invests exclusively in short-term US Treasury bills. An index fund available as both a mutual fund and an ETF, it tracks the Bloomberg US Treasury 1–3 Year Index which, as the name suggests, focuses on US Treasury bonds with a to three years to maturity. Given its very high quality, the fund assumes minimal credit risk. Interest rate risk has more influence on performance, but given the fund’s focus on the short end of the yield curve, even this risk is mitigated. The ultra-low expenses only add to the appeal here.

The best ETFs and mutual funds

Expenses are a particularly important factor to consider when investing in short-term bond funds, but they are also key when evaluating other types of funds. For more tips on finding good funds, read Morningstar’s Guide to Fund Investing. And check out our lists of the best funds in a variety of categories, including the best basic equity funds, the best small business funds, the highly rated growth equity funds and the value equity funds, the good international equity funds and even the best taxable bond funds. , which includes the funds presented here.


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