The 7 Best Bond Funds for Retirement Savers in 2021
Fixed-income investors have a rocky hill to climb in 2021. These are seven of the best bond funds to buy for this tall task.
Perhaps one of the easiest investing predictions to make for the coming year is that the bond market will be a challenge to navigate. And that could mean a frustrating time for retirement savers looking for the best bond funds to carry them through 2021 and beyond.
A wealth of analysts predict continued economic recovery in 2021, especially as several vaccines remain on track for eventual FDA approval followed by wide distribution. While that's great for the U.S. economy and publicly traded stocks, less uncertainty could end up pulling demand away from bonds.
Meanwhile, the Federal Reserve has signaled that while it will keep rates low at least through 2023, the chance of getting even lower rates is almost zero. This rate environment threatens to keep a lid on bond prices throughout the year.
So, where are fixed-income investors to look amid a low-yield backdrop with potentially little to no price potential in 2021?
Here, we look at seven of the best bond funds for retirement savers as we look ahead to 2021. Given the difficult environment, investors will want to hone in on features such as high-quality management, as well as thin expense ratios that won't dig too deeply into already depressed yields.
Returns and data are as of Dec. 1, unless otherwise noted, and are gathered for the share class with the lowest required minimum initial investment – typically the Investor share class or A share class. If you use an investment adviser or online brokerage, you may be able to buy lower-cost share classes of some of these funds. Yields are SEC yields, which 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.
Fidelity U.S. Bond Index
- Fund category: Intermediate-term bond
- Assets under management: $56.1 billion
- SEC yield: 1.1%
- Expenses: 0.025%
Fidelity U.S. Bond Index (FXNAX, $12.45) is a great bond fund to invest in not just for 2021, but for many years down the road, if you're looking for a low-cost, diversified core holding for the fixed-income portion of your portfolio.
The overriding lesson of 2020 is that smart investors can make educated guesses about the future direction of capital markets, but they really never know what will happen. For that reason alone, it pays to consider a broadly diversified bond index fund like FXNAX.
Fidelity U.S. Bond Index boasts a robust 2,300 bond holdings at present, including Treasuries (37%), investment-grade corporates (28%) and mortgage-backed securities (28%), among others. Duration, a measure of bond risk, is 5.3 years, implying that amid a 1-percentage-point rise in rates, FXNAX's net asset value would decline by 5.3%. (Yields and prices move in opposite directions.)
That said, this is an extremely high-quality portfolio; 99.9% of bonds are rated investment-grade by the major ratings agencies.
Fidelity U.S. Bond Index also is one of the best bond funds for investors pinching pennies. FXNAX, which can be productive in almost any economic and interest-rate environment, charges a mere 0.025% in annual expenses, meaning you'll pay just $2.50 annually for every $10,000 you have invested.
Metropolitan West Total Return Bond M
- Fund category: Intermediate core-plus bond
- Assets under management: $90.4 billion
- SEC yield: 1.1%
- Expenses: 0.68%
Metropolitan West Total Return Bond M (MWTRX, $11.67) is a core bond fund for investors who don't mind paying a little extra for savvy active management that can perform the benchmark.
And considering the 2021 fixed-income market could be one in which solid management really makes a difference, MWTRX stands out even further.
This Kip 25 fund utilizes a team approach. Group Managing Director Tad Rivelle has been on the team for 23 years, with a tenure that spans three recessions so far. Laird Landmann, Stephen Kane and Bryan Whalen also help manage MWTRX's assets.
As a "total return" bond fund, MWTRX focuses more on providing returns ahead of its primary benchmark, the Bloomberg Barclays U.S. Aggregate Bond Index, than it does on yield. And it has done just that, topping the benchmark over the trailing one-, three-, 10- and 15-year periods.
This makes Metropolitan West's total-return product one of the top bond funds for retirement savers and other investors who are seeking price appreciation first and yield second (or a combination of growth and income).
Dodge & Cox Income
- Fund category: Intermediate core-plus bond
- Assets under management: $66.5 billion
- SEC yield: 1.9%
- Expenses: 0.42%
Dodge & Cox Income (DODIX, $14.93) manages a portfolio of mostly investment-grade debt. And it makes our list of the best bond funds for retirement savers in 2021 because it has an optimal combination of low costs, strong performance, higher-than average yield and competent management.
We'll start with DODIX's expense ratio, which at 0.42% is costlier than many bond index funds, but it's still cheap for active management and below-average compared to category peers.
It's also buying you deep management experience. Dodge & Cox Income's nine managers average more than 15 years of tenure, including managers such as Dana Emery, Thomas Dugan and Larissa Roesch who have been with DODIX for at least two decades.
Meanwhile, historically, DODIX is in the top quartile ranking among its peers for every meaningful time period. At the moment, retirement savers will enjoy a (relatively) attractive yield of nearly 2%.
As for the portfolio itself, roughly 85% of DODIX's holdings are split between investment-grade corporates and securitized debt, with most of the rest in U.S. and other government debt. Its average credit quality of A is better than the category average, and its effective duration is 4.8 years.
In 2021, a focus on the middle – higher yields than short-term bond funds, but less interest-rate risk than long-term bond funds – could prove valuable for investors.
Great-West Multi-Sector Bond
- Fund category: Multisector bond
- Assets under management: $626.1 million
- SEC yield: 1.5%
- Expenses: 0.90%
As we mentioned earlier, the fixed-income market could be challenging thanks to a directionless rate environment in 2021. That makes a well-managed, go-anywhere bond fund like Great-West Multi-Sector Bond (MXLMX, $14.66) stand out among the top bond fund options for the year to come.
The multi-sector objective allows management to buy most kinds of bonds that are available on the market. At the moment, MXLMX has chosen to pour 72% of its assets in corporates – roughly twice the category average. Most of the rest is invested in securitized debt and government IOUs.
Speaking of management, the fund's assets are split between two subadvisers: Loomis Sayles and Newfleet Asset Management. Lead manager Dan Fuss has been with the fund since 1994 and boasts a whopping 63 years of industry experience, according to Morningstar.
Performance is downright spectacular. Even in MXLMX's worst long-term time frame (three years), it still ranks among the top 20% in its category with 5.4% annual returns. Across the trailing one-, five-, 10- and 15-year categories, it's typically within the top 15%.
Just note that MXLMX's flexibility includes the ability to chase after lower-quality debt – indeed, it can invest up to 65% of assets in "junk" debt. Currently, that number is just 42%, though another 31% is in BBB-rated debt – just one step above junk.
Vanguard High-Yield Corporate Investor
- Fund category: High-yield bond
- Assets under management: $27.6 billion
- SEC yield: 3.4%
- Expenses: 0.23%
If you want high yields in 2021, you're going to have to accept some level of risk to get them, which likely means dipping below investment-grade.
Vanguard High-Yield Corporate Investor (VWEHX, $5.94), another Kip 25 selection, is one of the best bond funds for retirement investors who are seeking higher levels of income without completely going into the junk deep end.
More than 90% of VWEHX's holdings are below investment-grade or not rated at all. That might sound hyper-risky, but understand that 55% of assets are BB-rated (the highest tier of junk), while another 29% are in B-rated bonds. Just less than 7% is below B, and a mere 1% isn't rated at all. Indeed, you even get small parcels of investment-grade debt, including a 5% slug of AAA-rated bonds.
The end result is a portfolio that can produce high yields but doesn't utterly sacrifice quality. While price performance can be choppier than core bond funds, VWEHX still delivers good long-term returns that are generally higher than the majority of its peers.
And you'll be collecting more than 3% in annual yield, which puts you in better position from a pure income perspective than many of the core bond funds we've previously discussed.
Vanguard Intermediate-Term Tax-Exempt Investor
- Fund category: Muni national intermediate-term bond
- Assets under management: $78.6 billion
- SEC yield: 1.0%
- Expenses: 0.17%
Retirement savers don't necessarily keep every penny locked up in tax-exempt accounts. For those with taxable accounts, Vanguard Intermediate-Term Tax-Exempt Bond Investor (VWITX, $14.80) could be an outstanding bond fund to sock away for 2021.
VWITX holds a whopping 11,000-plus municipal bonds, which produce income that is tax-free at the federal level (and some of which is also tax-exempt at state and local levels, depending on where you live). While the fund can hold bonds with maturities of any length, 75% of the portfolio typically is invested in intermediate-term bonds, which have maturities between six and 12 years.
The SEC yield of just 1.0% isn't anything to write home about, but it is a little better than it looks at first glance. You see, because that income is at least exempt from federal taxes, the "tax-equivalent yield" – effectively, the yield a taxable product would need to produce the same amount of post-tax income – actually comes to 1.7%.
Meanwhile, you're investing in a strong portfolio with an average credit rating of A, and you're doing so at a meager expense ratio of just 0.17%. That's exceedingly low compared to its peers, which cost 0.56% on average.
And VWITX is an admirable performer, sitting roughly around the top quartile in its category for every meaningful time period.
Vanguard Inflation-Protected Securities Investor
- Fund category: Inflation-protected bond
- Assets under management: $33.6 billion
- SEC yield: -1.1%
- Expenses: 0.20%
The Vanguard Inflation-Protected Securities Investor (VIPSX, $14.38), which sports a negative yield at the moment, clearly isn't an income play.
But it still might be a smart bet to make in 2021, then let it play out for a few years.
The Federal Reserve has said for months that it will loosen its core inflation rate target to keep rates low. In translation, the Fed seems content to allow inflation to rise above 2.0% for longer periods without reflexively fighting it off with higher rates. Presumably this could be the case through 2023.
Other factors that could contribute to inflation in the shorter term are more fiscal stimulus and a post-vaccine re-opening of the economy.
This sets up potential for the right environment (low rates, rising inflation) for a Treasury Inflation-Protected Securities (TIPS). You can read more about TIPS here, but in short, the principal value of these bonds rises and falls alongside the Consumer Price Index (CPI). In short, as inflation goes, so go TIPS.
While you could try to invest in individual TIPS, bond funds like Vanguard's VIPSX – which holds 56 different inflation-protected bonds – allow you to do so in a diversified manner at very little additional cost.
Assuming the Fed keeps rates low, even in the face of inflation, VIPSX could be a standout in the bond fund universe for the foreseeable future.