7 Best Bond Funds to Buy for Almost Any Investor
See a List of the Best Bond Funds and Why We Chose Them
When choosing the best bond funds to buy for you, the process of researching and analyzing can be challenging. There are many different types of bond funds and thousands of choices spread across various mutual fund families. But we did the research and came up with a short list of bond funds that can be smart choices for almost any investor.
How We Chose the Best Bond Funds
There's bond index funds, corporate bond funds, U.S. Treasury bond funds, high-income (junk) bond funds, foreign bond funds, emerging market bond funds, municipal bond funds, short-term bond funds, intermediate-term bond funds, long-term bond funds, treasury inflation-protected (TIPS) bond funds, multi-sector bond funds, and the list goes on.
Many investors buy and hold bond funds for a few primary purposes, including income, stability, and diversification. Retired investors may be seeking to meet all three of these objectives; whereas younger, long-term investors may looking for diversification. But for all investors, the best bond funds will typically have a combination of broad diversification and low expenses.
Investors wanting bond funds primarily for income can look at the 30-Day SEC Yield, which refers to a yield calculation that is based on the 30-day period ending on the last day of the previous month. The yield figure reflects the dividends and interest earned during the period, after the deduction of the fund's expenses.
Based upon this criteria, we hand-picked a selection of diversified, low-cost, no-load bond funds in three primary categories: 1) Bond Index Funds, 2) Actively-Managed ("Go Anywhere") Funds, and 3) Municipal Bond Funds.
Best Bond Index Funds
Bond index funds can be smart choices for investors looking for a broadly diversified selection of bonds, while keeping costs low.
The following three funds are the best index funds for investing in bonds:
Vanguard Total Bond Index (VBTLX)
This bond fund holds thousands of bonds, which combine to form the entire publicly traded US bond market. So when you're ready to expand your portfolio and balance the risk with a low-cost, diversified bond index fund, VBTLX is one of the best bond funds to buy. VBTLX has an extremely low expense ratio of 0.05% and a $3,000 minimum initial purchase.
Fidelity Total Bond (FTBFX)
If you're looking for a broadly diversified index fund that can potentially capture higher returns than similar funds in the long run, FTBFX is a fine choice. This bond fund holds over 2,700 bonds, but it's more concentrated than VBMFX, which holds over 10,000 bonds. The result, at least historically, is that FTBFX can potentially deliver superior returns in the long run (10 years or more) taking a bit more risk compared to average core bond index funds. Considering the potential for above-average long-term performance, FTBFX has a low expense ratio of 0.45% and no minimum initial investment.
Vanguard Intermediate-Term Bond Index (VBILX)
This index fund invests in intermediate-term bonds, which can be described as the "sweet spot" of bond investing. This is because intermediate-term bonds typically have higher yields and greater long-term performance than short-term bonds but have lower market risk than long-term bonds. Therefore, with VBILX, investors get a balance of risk and return, all with a low expense ratio of just 0.07%. The minimum initial investment for VBILX is $3,000.
Best Actively-Managed Bond Funds
Long-term investors who don't mind taking a bit of extra market risk might want to consider an actively-managed bond mutual fund that can hold any type of bond in a variety of different markets. Some actively-managed bond funds are categorized as "multi-sector" bond funds because they hold several different types of bonds, including the riskier high-yield bonds and foreign bonds.
Here are two of the best actively-managed, go-anywhere, multi-sector bond funds:
Loomis Sayles Bond (LSBRX)
Bond funds like LSBRX can produce stock-like returns in the long run, but investors need to be prepared for stock-like declines in tough markets. For example, when the economy tanked in 2008, LSBRX fell -22%. However, it jumped 37% in 2009, when the recovery began. Similarly, LSBRX had negative returns during the novel coronavirus crisis. For long-term periods, history reveals that the above-average risk can be worth the above-average performance. Another value of holding LSBRX is that you get Dan Fuss, who has been lead manager of LSBRX for more than 60 years. The expense ratio for LSBRX is a reasonable at 0.67% when you consider the experienced management team and winning performance. The Lipper Ranking for LSBRX has the fund in the top third for performance in the 1-, 3-, 5- and 10-year returns. The minimum initial investment for LSBRX (Class R shares) is $2,500.
Fidelity Strategic Income Fund (FADMX)
If you're looking for high yields and don't mind the higher relative risk that comes along with it, FADMX can be a good choice. This fund is best suited for investors with moderate to high-risk tolerance looking for high current income from their investments. If you don't mind occasionally exchanging below-average returns in the short term for the high 3.99% yield, FADMX can be a good choice bond investors seeking income. If you're looking for above-average returns, you may need to be patient, as FADMX has historically outperformed average multi-sector bond fund for 10-year returns, but not consistently for shorter periods. The expense ratio for FADMX is low for a multi-sector bond fund at 0.68% and there is no minimum initial investment.
Best Municipal Bond Funds
Investors wanting to keep taxes to a minimum may want to carefully consider the benefits of municipal bond funds, which are free of federal taxes and possibly free of state taxes (if the bond fund holds bonds within the state of the taxpayer's primary residence). Here we'll highlight municipal bond funds that hold bonds from all around the country. This will help maximize the potential for greater long-term returns and possibly higher yields.
Vanguard High Yield Tax Exempt (VWAHX)
Investors looking for a low-cost municipal bond fund that offers a smart balance of yield and return will like what they see in VWAHX. Not only does VWAHX seek to hold high-yielding bonds but it also has historically outperformed the high-yield bond index the 5- and 10-year returns. Combine that yield and performance with low expenses of 0.17% and a reasonable initial investment of $3,000, and you get one of the best no-load municipal bond funds in the mutual fund universe.
USAA Tax-Exempt Intermediate-Term (USATX)
If you want to add a highly rated, well-managed municipal bond fund to your portfolio, USATX is an outstanding fund to consider. A core feature of this bond fund is its above-average performance compared to other funds in the tax-exempt mutual fund category. Compared to the Lipper Intermediate Municipal Debt Funds Index, USATX outperforms in all of the main time periods, including 1-, 3-, 5- and 10-year returns. The expense ratio is far below average at 0.48% and the minimum initial investment for USATX is $3,000.
The Bottom Line
Bond funds are generally lower in market risk than stocks, and bonds can rise in value even as stocks decline, but the best use of bond funds is to use them in combination with stocks funds for a diversified portfolio of mutual funds.
While this list of top bond funds does highlight some of the best you can buy in the fixed income universe, these funds may not be the best fit for your personal financial goals. Before buying, be sure they are suitable for your risk tolerance and investment objective.
Disclaimer: The Balance does not provide tax, investment, or financial services and advice. The information is being presented without consideration of the investment objectives, risk tolerance or financial circumstances of any specific investor and might not be suitable for all investors. Past performance is not indicative of future results. Investing involves risk including the possible loss of principal.
Vanguard. "Vanguard Total Bond Market Index Fund Admiral Shares (VBTLX)." Accessed March 30, 2020.
Fidelity. "Fidelity Total Bond Fund." Accessed March 30, 2020.
Vanguard. "Vanguard Intermediate-Term Bond Index Fund Admiral Shares (VBILX)." Accessed March 30, 2020.
Morningstar. "Loomis Sayles Bond Retail." Accessed March 30, 2020.
Vanguard. "Vanguard High-Yield Tax-Exempt Fund Investor Shares (VWAHX)." Accessed March 30, 2020.
Morningstar. "USAA Tax Exempt Intermediate-Term USATX." Accessed March 30, 2020.