The 7 Best Bond Funds for Retirement Savers in 2019
Bond funds are for your “safe” money.
Bond funds are for your “safe” money. They give your portfolio ballast – and they’re a ready source of cash when you spot opportunities in the stock market.
Just keep the very long-term in mind and don’t get greedy with bonds in 2019. Almost every flavor of bond and bond fund lost at least a little money last year, and the same could happen this year.
For instance: Even the best long-term and even intermediate-term bonds and bond funds will likely do well only if there’s a dramatic slowdown in the economy, which would push down bond yields and boost their prices. (Bond yields and prices move opposite one another). Lower-credit-quality bonds, meanwhile, will only earn big profits if the economy, which seems likely to grow at a slower pace this year, instead continues to grow as rapidly as it did in 2018. Neither event looks likely.
But while bond funds may not make you rich, they’ll likely at least keep up with inflation, and they almost certainly won’t make you poor. They’re a safety play in a Wall Street environment that makes safety a necessity.
With that in mind, here are my favorite bond funds for retirement savers in 2019. The focus? Low-risk bond funds that invest mainly in short-term, high-quality bonds. The goal? Protection.
Data is as of Jan. 1, 2019. 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.
Vanguard Short-Term Investment-Grade Investor
- Market value: $58.3 billion
- SEC yield: 3.3%
- Expenses: 0.2%
More than half of Vanguard Short-Term Investment-Grade Investor (VFSTX, $10.44) is invested in corporate bonds, with other significant holdings in mortgage-backed securities and U.S. government debt, among other types of bonds. Overall, the fund’s holdings have a weighted credit quality of single-A, meaning the fund has little default risk.
VFSTX yields 3.3%, which is roughly the same as the Bloomberg Barclays Aggregate U.S. Bond Index (essentially, the bond world’s equivalent of the Standard & Poor’s 500-stock index). However, while the Barclays index has a duration of six years – which means if interest rates rise by one percentage point, the index should lose 6% – VFSTX has a duration of just 2.5 years.
Vanguard Short-Term Investment-Grade is managed with a light touch by two in-house Vanguard managers. Expenses are 0.2% annually, with a minimum initial investment of $3,000. Admiral shares, with a $50,000 minimum, cost 0.1%.
The only negative: You won’t earn much with this fund. Over the past 11 calendar years, VFSTX never earned more than 5.2% (in 2010) nor lost more than 4.7% (in 2008). Over the past five years, it returned an annualized 1.7%.
Vanguard Short-Term Corporate Bond Index Admiral and Vanguard Short-Term Corporate Bond ETF
- Market value (VSCSX): $25.9 billion
- SEC yield: 3.7%
- Expenses: 0.07%
Want to add just a smidgen more risk and return? Consider the index version of the previous fund, Vanguard Short-Term Corporate Bond Index Admiral (VSCSX, $21.22). It yields more, at 3.7%. The durations of the two funds are virtually equal, too; the index fund has a tad more credit risk.
The important difference: The index fund contains only corporate bonds – there’s no safety net of Treasuries should the economy tank. What’s more, roughly 40% of VSCSX is in financial-company issues, which could underperform in a down market. For my money, the slight additional risk is worth the extra yield.
This fund also has an identical twin ETF, Vanguard Short-Term Corporate Bond ETF (VCSH, $77.95). The fund and the ETF both returned 1.8% over the past five years, including 0.9% last year.
Pimco Income A
- Market value: $109.9 billion
- SEC yield: 3.6%
- Expenses: 1.14%
The Vanguard funds are about as vanilla as you can get. That’s fine, but it’s good to balance the simplicity offered by Vanguard with a complex fund from bond giant, Pimco.
- Pimco Income A (PONAX, $11.81), with a modest duration of 2.9 years, invests in a mind-boggling array of bond instruments, ranging from emerging-markets bonds to currencies to private residential mortgages to derivatives. Pimco has been investing in bonds so long and so well that it gives me confidence that it will be able to avoid most of the land mines that can explode in fixed income.
Just because Pimco Income has so many arrows in its quiver doesn’t mean it’s reckless. Indeed, over the past year or so what’s impressed me is how conservative the fund has grown, emphasizing safety over growth and fretting about too-narrow extra yields offered by junk bonds. The fund’s average credit quality is about BBB.
Expenses are 1.14%, which is on the high side. Also, do not buy this fund’s A shares directly from Pimco; it’s not worth the 3.75% front-end load that Pimco charges. But Pimco Income A is available without the sales charge from online brokerages, such as Fidelity, Schwab and TD Ameritrade. The fund returned an annualized 5.1% over the past five years, including a slight 0.2% gain in 2018 – a difficult year for bonds.
MetWest Unconstrained Bond
- Market value: $3.0 billion
- SEC yield: 3.9%
- Expenses: 1.04%
- MetWest Unconstrained Bond (MWCRX, $11.64), isn’t as risky as many unconstrained funds. “Unconstrained” in bond land means the managers don’t measure themselves against any one benchmark; instead, they just aim to produce good risk-adjusted returns.
Unconstrained invests about one-third of assets in corporate bonds. But the key to this fund is the nearly 60% of assets it invests in mortgage- and other asset-backed bonds, most of them not government-insured. Like several other successful funds in recent years, including Pimco Income, Total Return’s managers reason that a homeowner who has paid his mortgage on time for the past 10 years likely will continue to do so – even if the mortgage originally was classified as subprime.
Duration is quite short, at 2.1 years, meaning the fund wouldn’t be hurt much if rates spiked upward. MWCRX returned an annualized 2.2% over the past five years, including 0.7% last year.
Vanguard Limited-Term Tax Exempt Investor
- Market value: $26.0 billion
- SEC yield: 2.1%
- Expenses: 0.19%
- Vanguard Limited-Term Tax Exempt Investor (VMLTX, $10.86) is a low-risk, tax-exempt option. The stated SEC yield is only 2.1%, but remember: There are no federal taxes on that yield. A normally taxable fund would have to yield about 3.4% to equal the take-home yield on VMLTX. The fund’s duration is just 2.5 years, and it sticks almost entirely to high-quality munis. Average credit quality is AA and only 10% of assets are in BBB bonds, which still are investment-grade.
The fund tracks the Bloomberg Barclays 1-5 Year Municipal Index fairly closely. Manager Adam Ferguson’s bets lean toward the conservative side, so VMLTX overweights general obligation bonds and underweights controversial issues, such as tobacco bonds and Puerto Rico.
The fund costs 0.19% annually and has a $3,000 minimum investment. The Admiral shares (VMLUX) cost even less, at 0.09%, but require a $50,000 minimum investment.
The fund returned 1.6% in 2018, and it returned an annualized 1.3% over the past five years.
T. Rowe Price Short-Term Bond
- Market value: $5.4 billion
- SEC yield: 2.9%
- Expenses: 0.47%
- T. Rowe Price Short-Term Bond (PRWBX, $4.65) manager Michael Reinartz invests half the fund’s assets in corporate bonds and about one-third in asset-backed securities, including mortgages. Another 10% is in U.S. government bonds.
The fund yields 2.9% – that’s less than some of its peers, but so is its duration of just 1.8 years. The fund’s average credit quality is a conservative single-A, too, with more than a third of the portfolio carrying the highest (AAA) rating. Also, the expense ratio is 0.47%, which in general is low, but costs do chew up a big chunk of returns in a low-risk fund like this one.
No wonder, then, that the fund has averaged a modest 1.3% annual return over the past five years, including 1.6% in 2018. Still, PRWBX isn’t trying to be lucrative – it’s trying to be safe. This is a solid fund from a first-class fund company.
Steve Goldberg is an investment adviser in the Washington, D.C., area.