12 bond mutual funds and ETFs to buy for protection

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Mutual Funds and Mutual Fund Investing - Fidelity Investments

Clicking a link will open a new window. When the stock market took a beating this spring, nervous investors looked to bond mutual funds and exchange-traded funds (ETFs) for protection and sanity. After all, fixed income typically provides regular cash and lower volatility when markets hit turbulence. BIL hardly moves in good markets and in bad. For instance, from the start of 2020 through the March 23 market low, the S&P 500 lost more than 30% on a total-return basis. BIL? It improved by 0.5%. Since then, the S&P 500 is up 46.5%, while BIL has lost just 4 basis points. "The yield is a moving target and may approach zero soon due the Federal Reserve slashing rates," Sizemore said in March, and that has since come to pass – BIL yields nothing right now. "But you have essentially no interest-rate risk and you're parked in the safest corner of the bond market."

PIMCO Enhanced Short Maturity Active ETF

Assets under management: $13.9 billion SEC yield: 0.9% Expenses: 0.35%* If you prefer to have a human overseeing your short-term bond investments, you can look to actively managed ETFs such as PIMCO Enhanced Short Maturity Active ETF (). Like BIL, MINT is among the more conservative bond ETFs you can buy. The fund currently has more than 800 holdings, with a stated goal of "capital preservation, liquidity and stronger return potential relative to traditional cash investments." The trade-off? A little bit more risk than, say, a savings account or money-market fund – but far less risk than most other bond funds. The ETF's holdings are 94% invested in bonds with less than a year to maturity, with the remaining 6% invested in debt with no more than three years left. Nearly 80% of MINT's bonds have investment-grade credit ratings – the majority of that is corporates, though it also includes Treasuries and other bonds. MINT offers a "relatively attractive yield given its minimal interest-rate risk and can be a stronger alternative to sitting on the sidelines," CFRA's Rosenbluth says. *Includes 1-basis-point fee waiver.

Vanguard Short-Term Corporate Bond Index Fund ETF

Assets under management: $29.5 billion SEC yield: 1.1% Expenses: 0.05% Another way to invest in short-term debt is the Vanguard Short-Term Corporate Bond Index Fund ETF Shares (). Given the financial damage happening to even good publicly traded companies, corporate bond funds – even ones that hold investment-grade debt – are hardly bulletproof. Thus, it's worth pointing out that 90% of the bonds in VCSH are in the A or BBB range, the lower of the four investment-grade tiers. "But given that the holdings are investment-grade bonds with only five years or less to maturity, your risk is tolerably low," Sizemore says. Indeed, the average maturity of bonds in the fund is just under three years. The yield of 1.1% is modest. However, relative stability and an uber-cheap expense ratio make VCSH a decent place to wait out the volatility. If you prefer mutual funds, Vanguard offers an Admiral-class version ().

Vanguard Intermediate-Term Bond

Assets under management: $13.6 billion SEC yield: 1.1% Expenses: 0.05% The Vanguard Intermediate-Term Bond ETF () is an "in the middle fund" that invests exclusively in intermediate-term, investment-grade debt. It's another index fund, this time investing in bonds with maturities between five and 10 years. Roughly half the fund is invested in Treasuries and other U.S. government bonds, with another 46% in investment-grade corporates, and most of the rest in foreign sovereigns. The idea here is to provide more yield than in similarly constructed funds, though at the moment, BIV's yield isn't too differentiated from shorter-term funds. Year-to-date, however, it's beating the "Agg" benchmark by 227 basis points. Vanguard Intermediate-Term Bond ETF also has a mutual fund version ().

Vanguard Long-Term Bond ETF

Assets under management: $5.4 billion SEC yield: 2.3% Expenses: 0.05% If you do want to roll the dice on longer-term investments for a little more yield, bond ETFs such as the Vanguard Long-Term Bond ETF () can get the job done. The roughly 2,500-bond portfolio is heaviest in investment-grade corporate debt (52%), followed by Treasury/agency bonds (41%). Almost all of the rest of BLV's assets are used to hold investment-grade international sovereign debt. The added risk comes in the form of longer maturity. About 72% of the fund is invested in bonds maturing in 20 to 30 years, 23% is in the 10-to-20 range, 4% is in bonds with 30-plus years remaining, and the rest is in the five-to-10 range. Because there's more of a chance these bonds won't get paid off than bonds that expire, say, a year from now, that means this fund can rise and fall a lot more than funds like MINT that deal in short-term debt. But the higher yield might be tempting to some investors. "Unless you see interest rates rising in the near future, owning a long-term bond fund can provide substantially more income to your portfolio," says Daren Blonski, managing principal of Sonoma Wealth Advisors in California. "If interest rates do rise, a long-term bond fund would underperform." Like many other Vanguard bond ETFs, BLV trades as a mutual fund (), too.

Vanguard Core Bond Fund Investor

Assets under management: $2.2 billion SEC yield: 1.4% Expenses: 0.25% Investors looking for an actively managed core bond mutual fund can look to Vanguard Core Bond Fund Investor (). VCORX invests across the spectrum of investment-grade debt, and it does so across bonds in a wide range of maturities. The portfolio includes nearly 1,300 bonds at the moment, with an average effective maturity of 7.3 years. Government mortgage-backed securities are the largest chunk of holdings at almost 37%, followed by investment-grade corporates (35%) and Treasuries (16%). But it has several other sprinklings, including foreign sovereign bonds, asset-backed securities and short-term reserves. VCORX () a young fund that only got its start back in 2016, but so far it’s doing well, with a three-year total return of 18.4% that’s more than a percentage point better than the AGG ETF’s total return. And this actively managed fund is priced like an index fund at 0.25% in annual fees.

DoubleLine Total Return Bond Fund Class N

Assets under management: $50.4 billion SEC yield: 2.94% Expenses: 0.73% Managed by well-known bond portfolio manager Jeffrey Gundlach, the DoubleLine Total Return Bond Fund Class N () acts as a "nice diversifier to core fixed income while providing current income without overstretching in quality for higher yield and strong risk-adjusted returns in varying market and interest-rate environments," says Nicole Tanenbaum, partner and chief investment strategist at Chequers Financial Management, a San Francisco-based financial planning firm. While DLTNX is a "total return" fund, its primary vehicle is mortgage-backed securities of varying types. Nearly 80% of the bond mutual fund's assets are invested in these right now, with the rest sprinkled among debt such as Treasuries and other asset-backed securities, as well as cash. "In today's persistent low-yield environment, many investors had been drifting away from safer core bond holdings toward riskier, high-yield credit given the more attractive yields they offer," Tanenbaum says. "While it may be tempting to reach for these higher yields to generate more income, it is critical for investors to fully understand the underlying credit quality of the bonds they are choosing to receive that higher yield." The Retail-class N shares we list here require a $2,000 minimum investment in normal accounts or $500 in an IRA. You can invest in the lower-expense Institutional-class shares () with a $100,000 minimum investment in normal accounts, or a $5,000 minimum investment in an IRA.

BlackRock Strategic Income Opportunities Investor A

Assets under management: $31.4 billion SEC yield: 1.6% Expenses: 1.14% The BlackRock Strategic Income Opportunities Investor A () is an actively managed bond mutual fund that should complement core bond exposure to increase your risk-adjusted returns. Managers Rick Reider, Bob Miller and David Rogal have been with the fund for varying amounts of time, with Reider boasting the longest tenure in BASIX () at roughly a decade. This isn't your garden-variety bond fund. More than 15% of BASIX's () assets are invested in "interest-rate derivatives" – hedges that institutional investors use against movements in interest rates. Another 16% is invested in emerging-market bonds, and the rest is split among debt such as junk bonds, Treasuries, collateralized loan obligations (CLOs) and more. Performance is a mixed bag against the "Agg" bond index, though it's far less volatile than both the market and even the Nontraditional Bond category. But one thing weighing down its performance is high costs – not just a 1.14% expense ratio, but also a 4% maximum sales charge. But you can get around this if you have access to the Institutional shares (), which have no sales charge and a 0.62% annual fee. While an individual using a regular account would need to scrape together a whopping $2 million minimum initial investment, investors whose assets are managed by independent financial advisors might be able to access this share class for a far more reasonable minimum investment. You also might be able to access BSIIX () via your 401(k) or other employer-sponsored retirement plan.
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2021 The Kiplinger Washington Editors, Inc.

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