Investors looking for stability often turn to the fixed-income market, seeking out the best bond funds and bond ETFs to buy. This is because these debt securities are often much less volatile than stocks.
In fact, bankruptcy laws generally state that if a company fails, it is the bondholders that must be made whole first – whereas the failure of a publicly traded company could leave investors with shares that are totally worthless.
Of course, the tradeoff is that it's almost impossible to imagine bonds delivering a quick 10% or 20% in principal gains, while the stock market just pulled off back-to-back 20%-plus years of generating those kinds of profits. Stability has a cost.
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Are bonds good retirement investments?
At the same time, if you're near retirement and/or your biggest concerns are capital preservation and income, you can't overlook bonds and the best bond funds.
At a minimum, investors should consider modest exposure to fixed-income assets to add diversification to their portfolios.
And if your nest egg is large enough, the best bond funds may even make sense as your core asset as a way to protect your hard-earned money.
Are bonds a good investment this year?
It's been a rough run for bonds.
The Morningstar US 10+ Year Treasury Bond Index posted a cumulative loss of 47.6% between March 10, 2020, and October 19, 2023, as the yield on the 10-year U.S. Treasury note increased from 0.54% to 4.98%.
As Morgan Stanley managing director Martin L. Leibowitz once wrote, "When rates can only go up, and when the price sensitivity of any given cash flow is near its maximum, it's a pretty toxic combination."
The Federal Reserve finally observed sufficient progress on the inflation front to begin a rate-cutting cycle in September. But the yield on the 10-year U.S. Treasury note has actually increased more than 100 basis points since then, rising on solid economic data as well as fiscal and trade policy uncertainty heading into a second Trump administration.
According to Brian Rehling, head of global fixed income strategy at Wells Fargo, "The Fed has leeway to cut interest rates further in the early months of 2025 while inflation permits. However, we look for the Fed to proceed cautiously."
Rehling and Wells Fargo expect the Fed to announce "just one additional rate cut between now and the end of 2025." The bond market will continue to move based on policy announcements and incoming economic data, Rehling notes, "especially around the trajectory of inflation and how the Fed adjusts policy. "
With stocks rising amid what seems a never-ending bull market, many investors are content to ignore bonds altogether.
But spiking equity market volatility, a changing environment for interest rates and rising uncertainty highlight the potential for the best bond funds as foundational pieces in every portfolio.
How to find the best bond funds
There is no single investment or asset class that works for every portfolio. Bonds are characterized by capital preservation and income potential, for example, rather than growth potential, which is what drives stock prices higher.
And there is differentiation within the fixed-income market too: Some bond funds yield more than others based on their risk profile. All that said, investors who take a holistic approach can make any of these bond funds a foundational holding in their investing strategy.
To put together our list of the best bond funds, we looked for well-established vehicles with at least $1 billion in assets. And we honed in on those that are accessible to the majority of investors with minimum investment thresholds of $3,000 or less.
These funds span several strategies to help investors find the right product for their risk tolerance and their financial goals.
Data is as of January 6. SEC yields reflect the interest earned after deducting fund expenses for the most recent 30-day period and are a standard measure for bond and preferred-stock funds.
You always should always do your own research, but these are five of the best bond funds to buy now.
Vanguard Total Bond Market Index Fund Admiral Shares
- Assets under management: $345.7 billion
- SEC yield: 4.5%
- Expense ratio: 0.05%
The Vanguard Total Bond Market Index Fund Admiral Shares (VBTLX, $9.46) is the most popular Vanguard mutual fund for bond investors. It's also one of the largest mutual funds of any kind in the world.
Like many popular Vanguard offerings, the approach is simple and cost-effective: VBTLX provides exposure to the fixed-income market in one simple broad-based fund.
Managers oversee a portfolio of more than 11,000 investment-grade bonds. These are debt securities of high credit quality issued by government entities and/or corporations at lower risk of default.
U.S. government bonds account for approximately 48% of total assets, with another 20% invested in agency debt including pools of mortgage-related assets backed by federal agencies. The rest is allocated to top-tier corporate debt and similar securities.
Holdings tend to be of medium-term duration, the portfolio characterized by bonds with an average maturity of about 8.4 years.
With hundreds of billions in assets behind this approach, VBTLX offers a well-established and affordable way to play the totality of investment-grade bonds in a single mutual fund.
Learn more about VBTLX at the Vanguard provider site.
PIMCO Income Fund A
- Assets under management: $172.3 billion
- SEC yield: 4.5%
- Expense ratio: 0.90%
There's a lot of uncertainty reflected in the bond market after a fairly volatile trading environment across 2024. That includes interest rate policy at the Fed amid lingering concern about whether inflation can be tamed – and what the central bank's approach means for the broader global economy.
The PIMCO Income Fund A (PONAX, $10.53) looks to minimize the impact of unexpected shifts in the landscape in the coming year and at the same time to profit from any significant changes through an actively managed and "unconstrained" approach.
In other words, the experts at the helm of PONAX have leeway to allocate more (or less) to certain areas of the bond market rather than stick to an index like VBTLX, for example.
As a respected leader in the bond world, PIMCO operates some of the largest fixed-income mutual funds in the market. PONAX, one of its flagship products, holds about 9,000 individual bonds.
It yields a bit more than other intermediate-term bond mutual funds because management makes responsible investments in higher-yielding, higher-risk offerings such as emerging-market debt. And about 10% of total assets are allocated to junk bonds.
If you're interested in playing the totality of the bond market in a more tactical way, this well-respected and actively-managed option is one of the best bond funds to buy now.
Learn more about PONAX at the PIMCO provider site.
Vanguard Total International Bond Index Fund Admiral Shares
- Assets under management: $100.6 billion
- SEC yield: 2.9%
- Expense ratio: 0.11%
Bond mutual funds are attractive as foundational investments because they provide diversification beyond stocks. For investors seeking international diversification as well, the Vanguard Total International Bond Index Fund Admiral Shares (VTABX, $19.57) is a great option to layer into any portfolio.
With approximately 6,800 bonds in its portfolio, VTABX gives investors access to global markets outside the United States. Top regions include Europe at 57% and Asia-Pacific at 20%, with the majority of those bonds in Japan.
There is a small allocation to bonds from emerging markets, but every asset in this fund is an investment-grade security with a rating of BBB or better to ensure a strong chance of repayment.
As an "ex-U.S." fund, VTABX is a great supplemental holding for any portfolio. This bond mutual fund can easily be layered on top of other domestic bond funds on this list, reducing your risk profile without duplicating existing positions.
Learn more about VTABX at the Vanguard provider site.
Vanguard Short-Term Corporate Bond Index Fund
- Assets under management: $41.5 billion
- SEC yield: 4.8%
- Expense ratio: 0.07%
Normally, longer-dated bonds yield more than shorter-dated bonds because of the added duration risk they carry. After all, a lot more can go wrong over the next two decades than the next two years.
But, in the current economic environment, we've seen bond markets trade into an inverted yield curve, where short-dated bonds actually pay more than longer-dated bonds.
Bond investors can take advantage of this trend by focusing on shorter-term bonds via the Vanguard Short-Term Corporate Bond Index Fund (VSCSX, $21.24). As the name implies, there is no U.S. Treasury debt here, only bonds issued by top-rated corporations like Bank of America (BAC), Boeing (BA) and CVS Health (CVS).
With issuers including some of the biggest name-brands on the planet and an effective maturity of just 2.8 years, the bonds that make up this mutual fund portfolio are rock-solid.
But thanks to the nature of the yield curve as well as the fact that corporate bonds generally pay more than Treasuries, you can harness income that's almost three times the S&P 500’s dividend yield while maintaining a relatively low risk profile.
Learn more about VSCSX at the Vanguard provider site.
Fidelity Inflation-Protected Bond Index
- Assets under management: $9.2 billion
- SEC yield: 3.1%
- Expense ratio: 0.05%
This bond mutual fund is a tactical option that could prove increasingly useful in the age of rising costs for businesses and consumers.
The Fidelity Inflation-Protected Bond Index Fund (FIPDX, $8.88) invests in Treasury Inflation-Protected Securities, or TIPS. This special class of bonds is benchmarked to the widely followed Consumer Price Index, which represents a basket of household expenditures including transportation, food and housing.
TIPS work like this: When the CPI rises, the principal value of TIPS rises as well. And you get paid interest based on the adjusted principal. That means you could see tremendous payouts should an already elevated inflation rate accelerate due to tariffs and trade wars in 2025.
There is downside risk for TIPS if and when inflation does cool in the future.
That said, if you want to profit from the trend of rising prices – or at least establish a hedge against inflation – FIPDX is one of the best bond funds to consider.
Learn more about FIPDX at the Fidelity provider site.
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