7 Bond Funds to Anchor Your Retirement Portfolio

Vanguard Short-Term Investment-Grade Fund Investor Shares

• Assets under management: $79.3 billion
• SEC yield: 0.8%
• Expenses: 0.20%, or $20 annually for every $10,000 invested
• Initial minimum investment: $3,000

If your goal is absolute portfolio stability, then focusing on the short-term of the yield curve is your best option. The longer a bond's duration, the more susceptible it is to interest-rate risk, as rising market bond yields means falling bond prices. But for shorter-term bonds, the risk from interest rates is generally minimal.

With that as background, the Vanguard Short-Term Investment-Grade Fund Investor Shares (VFSTX, $10.93) is an investment-grade short-term bond fund with an 0.8% yield. The portfolio is a mixture of U.S. Treasury securities, high-quality corporate securities and pooled consumer loans.

You're not stacking up the cash at a rate like that, but if your goal is stability, it delivers. And in a world in which the Fed has kept short-term rates anchored at zero, 0.8% is a respectable yield to collect on what is essentially idle cash.

The critical point here is that the fund has essentially no risk of significant loss from hikes in interest rates or sustained rises in bond yields. The average effective maturity of its holdings is less than three years.

And as far as bond funds go, credit risk is of very little concern for this one, as well, considering virtually the entire portfolio is investment-grade with most of the holdings rated A or higher.

Again, you're not going to build wealth by adding VFSTX to your portfolio of retirement funds. But it is a convenient place to park cash that you're not quite ready to invest or prefer to hold in reserve.

Learn more about VFSTX at the Vanguard provider site.

iShares Floating Rate Bond ETF

• Assets under management: $6.7 billion
• SEC yield: 0.1%
• Expenses: 0.20%
• Initial minimum investment: N/A

With short-term interest rates pegged at effectively zero by the Federal Reserve, investors are watching anxiously for any indication that Fed Chair Jerome Powell will be making a move.

One way to largely sidestep interest-rate risk is to focus on floating-rate bonds. Floating-rate bonds are not "fixed" income, per se, as the coupon payment will shift based on changes in market rates. Floating-rate bonds give investors the ability to actually benefit from rising bond yields rather than suffer from them.

As a way to get exposure to floating-rate bonds, consider the shares of the iShares Floating Rate Bond ETF (FLOT, $50.79). FLOT holds a portfolio of approximately 300 short-term investment-grade bonds with a portfolio duration of just 0.10 years.

FLOT doesn't yield much at 0.1%. But should the Fed raise interest rates, you'll see that yield rise. And in the meantime, you should enjoy stability with this bond fund, as the share price rarely moves more than about 10 cents in either direction over the course of a year.

Learn more about FLOT at the iShares provider site.

Vanguard Total Bond Market ETF

• Assets under management: $317.8 billion
• SEC yield: 1.3%
• Expenses: 0.035%
• Initial minimum investment: N/A

If you're looking for diversified exposure to "the bond market” as a whole, the Vanguard Total Bond Market ETF (BND, $85.83) is likely your best bet. It's large, liquid and has some of the lowest expenses you're going to find in the industry. And if you prefer mutual funds over exchange-traded funds (ETFs), Vanguard offers the same portfolio via the Vanguard Total Bond Market Index Fund Admiral Shares (VBTLX).

BND's portfolio of over 10,000 bonds is invested about 65% in U.S. Treasury or agency mortgage bonds, with the remaining 35% invested primarily in investment-grade corporate bonds or non-agency mortgage bonds. This is a high-quality bond portfolio that is unlikely to ever give you a headache.

The average duration of BND's portfolio is 6.8 years. In plain English, that means that a 1% increase in interest rates should correspond to an approximate 6.8% decrease in the fund's price, and vice versa.

So, while BND's shares might be slightly more at risk from rising yields than the other bond funds featured here, that risk is generally very tolerable. It's unusual for the share price to move more than a couple of dollars in a given year.

Learn more about BND at the Vanguard provider site.

Vanguard Total International Bond ETF

• Assets under management: $118.5 billion
• SEC yield: 0.4%
• Expenses: 0.08%
• Initial minimum investment: N/A

Most American investors should keep the bulk of their bond investments denominated in U.S. dollars. If your expenses are in dollars, it only makes sense that the assets on hand to meet those expenses are in dollars.

That said, a little diversification makes sense. The U.S. dollar fluctuates relative to other world currencies, and the general trend has been down since March of last year.

The U.S. government's vigorous response to the COVID-19 pandemic, including massive budget deficits and aggressive action by the Federal Reserve to pump liquidity into the market, have made the dollar comparatively less appealing. The dollar index – which measures the dollar's performance against a basket of developed-world currencies such as the euro and yen – is down about 10% from its early pandemic highs.

The dollar may recoup some of these losses once the Fed scales back its stimulus. But regardless, an international bond fund like the Vanguard Total International Bond ETF (BNDX, $57.11) can offer a little diversification out of the dollar. The ETF holds a portfolio of investment-grade bonds primarily in Europe and Japan. And with an effective duration of 8.5 years, the ETF falls into the intermediate-term range with only modest interest-rate risk.

You won't likely make a killing in BNDX, but a small allocation could give you a little diversification out of the dollar.

Learn more about BNDX at the Vanguard provider site.

iShares National Muni Bond ETF

• Assets under management: $23.6 billion
• SEC yield: 0.8%
• Expenses: 0.07%
• Initial minimum investment: N/A

For investors in high tax brackets, municipal bonds can offer a welcome respite.

Most bonds issued by state and local governments are exempt from federal taxes. And while municipal bonds are not as safe as U.S. Treasury bonds, as only the U.S. government makes the grade as "risk free," credit risk is generally very low. State and local governments generally have the power to raise taxes to meet their obligations if push comes to shove.

Tax laws are a patchwork quilt that can vary wildly from state to state. Depending on which one you call home, it may be far more advantageous to hold a locally issued bond rather than one from another state. But for broad exposure to the muni bond market, consider the iShares National Muni Bond ETF (MUB, $116.56).

MUB covers a broad swath of the muni market, with a portfolio of over 2,000 assorted state and local bonds. The effective duration of the ETF is a modest 5.9 years, meaning interest-rate risk is only moderate.

When it comes to bond funds, this one isn't the highest yielding you'll find, with a 30-day SEC yield of 0.8%. But remember, that yield is tax free. So, if you're in the highest tax bracket, that works out to a tax-equivalent yield of 1.4%.

You're not getting rich on that, of course. But it's a competitive yield in this market and provides a little diversification outside of Treasury and corporate bonds.

Learn more about MUB at the iShares provider site.

DoubleLine Total Return Bond Fund Class N

• Assets under management: $49.4 billion
• SEC yield: 2.9%
• Expenses: 0.75%
• Initial minimum investment: $2,000

For most target bond exposure, passive management is generally fine. But active management by a competent leader can add value by providing diversification. And for a solid actively managed fund, consider the DoubleLine Total Return Bond Fund Class N (DLTNX, $10.52).

Founded and managed by "Bond King" Jeffrey Gundlach, the DoubleLine fund has a broad mandate that gives it flexibility, though it primarily invests in mortgage-backed securities and related assets.

An investment in the DLTNX is a bet on Jeffrey Gundlach, as the fund's annual turnover is more than 90%. That's not a bad thing if tactical investing and diversification are what you're looking for in bond funds.

Gundlach's returns have been somewhat mediocre over the past couple years, but DLTNX's returns since inception have beaten its benchmark by a staggering 43% (5.4% annualized vs. 3.8% for its benchmark). Gundlach boasts just one losing year since the fund's 2010 inception – a miniscule 0.2% loss in 2013.

Gundlach is one of the all-time greats, and his fund is a good diversifier to any bond index funds you might own.

Learn more about DLTNX at the DoubleLine provider site.

Vanguard Inflation-Protected Securities Fund Investor Shares

• Assets under management: $36.9 billion
• SEC yield: -1.7%
• Expenses: 0.20%
• Initial minimum investment: $3,000

Fed Chair Jerome Powell has been insisting for months that the recent surge in inflation will be "transitory" and will fade once the COVID-related dislocations are worked through.

And while the consumer price index shows inflation is running hot at any annual clip over 5%, it does appear that the Fed's outlook is correct, at least if the price action in the bond market and gold market is any indication. Bond yields have remained low and gold prices have actually retreated over the past year.

But what if the Fed is wrong? What if higher inflation isn't transitory and ends up being systemic?

Owning some inflation-adjusted bonds or bond funds is a solid idea … just in case. The Treasury's inflation-protected securities, better known as TIPS, are bonds issued by the U.S. government that have a built-in inflation adjustment. The Vanguard Inflation-Protected Securities Fund Investor Shares (VIPSX, $14.750 ) is a convenient way to get access to this asset class.

The bonds this fund holds are all issued by the U.S. government, meaning there is officially no credit risk. The bonds do have an average effective maturity of about eight years, which also makes interest-rate risk slightly higher, but also tolerable. Remember, bond prices fall when yields rise, and this effect is more pronounced the longer the bond's duration.

We can't know for sure what the future will hold, but if inflation really does get out of hand, TIPS will provide protection in a way most retirement funds simply can't.

* Note: Investors able to invest at least $50,000 can get the same exposure at a lower expense ratio (0.10%) via Vanguard's Admiral shares (VAIPX).

Learn more about VIPSX at the Vanguard provider site.