Finding the Best Index Bond Funds and Avoiding the Worst

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Finding the best bond funds in 2019 may be just as challenging as avoiding the worst bond funds, if the past is any indication. With interest rates and inflation expected to moderate in 2019, fixed income investing is sure to be a challenge. But there are a few bond fund types that are likely to perform better than others.

The Best Bond Funds for Investing in 2019

Before choosing the best bond funds to buy for any given period of time, keep in mind that bond prices and interest rates have an inverse relationship, which means that bond prices are generally rising when interest rates are falling and bond prices are generally falling when interest rates are rising.

Since rates were rising in 2018 and are expected to remain constant in 2019, now can be a good time to increase exposure to bond index funds. When buying index funds, it's important to keep costs low. For this reason, the primary criterion we used for finding the best bond funds include low expenses. Since interest rates are expected to remain constant, short-term index funds look less attractive, which is why intermediate- to long-term maturities in the bond funds were a secondary, although important, criterion for choosing the best bond funds for 2019.

With that in mind, here are some of the best bond funds to buy in 2019:

  • Total Bond Market Index Funds: Index funds have outperformed actively-managed bond funds in recent years because managers have failed to accurately predict interest rates and the actions of the Federal Reserve. Therefore, a passively-managed bond fund could be your best bet in what may be another unpredictable 2019. The total bond market index usually refers to index mutual funds or Exchange Traded Funds (ETFs) that invest in the Barclay's Aggregate Bond Index, also known as the BarCap Aggregate, which is a broad bond index covering most U.S. traded bonds and some foreign bonds traded in the U.S. Investors can capture the performance of the overall bond market by investing in an index mutual fund or ETF that seeks to replicate the performance of the index. Fund examples include iShares Barclays Capital Aggregate Bond Index (AGG) and Vanguard Total Bond Market Index Fund (VBMFX). However, also keep in mind that index funds are passively managed, which means the manager can't make adjustments for rising rates. Therefore, some index funds could lose to actively-managed funds. In different words, index funds are a good idea in unpredictable environments, when active managers tend to make more mistakes.
  • Bond Funds for Rising Interest Rates: If you believe interest rates and inflation will begin falling in 2019 or early 2020, there are some bond fund types that can take advantage of this. Rising interest rates make prices of bonds go down but the longer the maturity, the farther prices will fall. The opposite is also true: If interest rates start falling again, the longer maturities will perform better. A good bond index fund for this is Vanguard Long-Term Bond Index (VBLAX). Vanguard also offers an ETF of the same fund with the ticker, BLV. Both bond funds have a low expense ratio of 0.07%.

    The Worst Bond Funds for Investing in 2019

    • High Yield (Junk) Bond funds: In addition to interest rates, investors and the capital markets also affect bond prices and yields. As the economy matures and investors begin looking forward to recession, they are not as willing to pay as much in price for a high-risk bond and junk bonds have greater default risk than higher credit quality bonds like US Treasuries.

    Disclaimer: The information on this site is provided for discussion purposes only, and should not be misconstrued as investment advice. Under no circumstances does this information represent a recommendation to buy or sell securities.