The process of researching and analyzing can be a challenge when you're choosing the best bond funds to buy. There are many types of bond funds, with thousands of options spread across mutual fund families.
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 are 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, and multi-sector bond funds. The list goes on.
You might buy and hold bond funds with a few goals, such as income, stability, and diversification. Retired investors may seek to meet all three of these goals. Long-term investors may look more for diversification. The best bond funds will often combine broad diversification and low expenses for all investors.
Those who want bond funds mostly for income can look at the 30-Day SEC Yield, which refers to a calculation that's based on the 30-day period ending on the last day of the prior month. The yield figure reflects the dividends and interest earned during that time after the deduction of the fund's expenses.
We've hand-picked some diversified, low-cost, no-load bond funds based on these rules. We've grouped them as bond index funds, actively managed ("go anywhere") funds, and municipal bond funds.
Best Bond Index Funds
Bond index funds can be smart choices if you're looking for a broadly diversified selection of bonds while keeping your costs low.
Vanguard Total Bond Index (VBTLX)
This bond fund holds thousands of bonds. They combine to reflect a wide spectrum of the publicly traded U.S. bond market. VBTLX is one of the best bond funds to buy when you're ready to expand. It will balance risk with a low-cost, diversified bond index fund.
The fund has a very low expense ratio of 0.05%. The minimum initial purchase is $3,000. The corresponding ETF trades as BND with a 0.035% expense ratio and one-share minimum purchase.
Fidelity Total Bond (FTBFX)
FTBFX is a fine choice if you're looking for a broadly diversified index fund that can capture higher returns in the long run than similar funds.
This bond fund held 3,056 bonds as of March 2021. It's more concentrated than VBTLX, which held 10,118 bonds at that time. The result is that FTBFX can deliver better returns in the long run (10 years or more). But it takes a bit more risk compared to average core bond index funds.
FTBFX has a low expense ratio of 0.45%. There's no minimum initial investment.
Vanguard Intermediate-Term Bond Index (VBILX)
This index fund invests in intermediate-term bonds. These can be described as the "sweet spot" of bond investing. Intermediate-term bonds often have higher yields. They have greater long-term performance than short-term bonds. But they have lower market risk. You get a balance of risk and return, all with a low expense ratio of just 0.07%, with VBILX. The minimum initial investment for VBILX is $3,000.
You can also buy it as an ETF using the symbol BIV, with a one share minimum. The expense ratio is 0.05%.
Best Actively Managed Bond Funds
Long-term investors who don't mind taking a bit of extra market risk might want to think about an actively managed bond fund. It can hold any type of bond in different markets. Some actively managed bond funds are categorized as "multi-sector." They hold many types of bonds, including the riskier high-yield bonds and foreign bonds.
These 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 you should be prepared for stock-like declines in tough markets. LSBRX fell 22% when the economy deteriorated in 2008, but it jumped 37% in 2009 when the recovery began.
The above-average risk can be worth the above-average performance for long-term periods. The expense ratio for LSBRX is 0.92%, which seems fair when you think about the experienced management team and winning performance. The minimum initial investment for LSBRX (Class R shares) is $2,500.
Fidelity Strategic Income Fund (FADMX)
FADMX can be a good choice if you're looking for high yields and don't mind the higher risk that comes with that. This fund is best suited for those with moderate-to-high risk tolerance who are looking for high current income from their investments.
FADMX can be a good choice if you don't mind exchanging below-average returns in the short term for the 2.14% yield.
You may have to be patient if you're looking for above-average returns. FADMX has often outperformed average multi-sector bond funds for 10-year returns, but not always for shorter periods. The expense ratio for FADMX is low for a multi-sector bond fund at 0.67%. There is no minimum initial investment.
Best Municipal Bond Funds
You may want to think about the benefits of municipal bond funds if you want to keep your taxes down. They're free from federal taxes, and they can be free from state taxes as well if the fund holds bonds issued within the state of your primary residence. There are municipal bond funds that hold bonds from all around the country. Holding such a fund will help maximize the odds for greater long-term returns and possibly higher yields.
Vanguard High Yield Tax Exempt (VWAHX)
You'll like what you see in VWAHX if you're looking for a low-cost municipal bond fund that offers a smart balance of yield and return. Not only does VWAHX seek to hold high-yielding bonds, but its five- and ten-year returns often outperform a high-yield bond index.
Combine that yield and performance with low expenses of 0.17% and an initial investment of $3,000, and you get one of the best no-load municipal bond funds in the mutual fund world.
USAA Tax-Exempt Intermediate-Term (USATX)
USATX is a very good fund to think about if you want to add a highly rated, well-managed municipal bond fund to your portfolio. One core feature of this fund is its above-average performance compared to other funds in the tax-exempt category.
The expense ratio is far below the norm at just 0.49%. The minimum initial investment for USATX is $3,000.
The Bottom Line
Bond funds are often lower in market risk than stocks. Bonds can rise in value even as stocks decline. The best use of bond funds is to combine them with stock funds for a diversified portfolio of mutual funds.
This list of top bond funds highlights some of the best you can buy in the fixed income world, but these funds may not be the best fits for your own goals. Be sure they are suitable for your risk tolerance and investment goal before buying.
Frequently Asked Questions (FAQs)
When is the best time to buy bond funds?
The best time to buy bonds is when your investment goals are primarily income or capital preservation. Bond funds are much better at achieving those goals than stock funds, but bond fund investors sacrifice the potential for significant capital gains. In terms of market timing, an active trader may want to try to buy bonds when interest rates are at their peak; this locks in the highest possible yield rate and allows for the potential of some capital gains if interest rates fall.
Which bonds do best when the broader market is falling?
When the market faces a downturn, the bonds that hold up the best are typically those with the least amount of credit and interest rate risk. In other words, the more reliable the bond issuer, and the shorter the duration of the bond, the more resilient it might be against broader market weakness.
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.