Introduction: The Best Bond Funds and How to Find Them (Municipal, High-Yield, and Corporate Bonds)
It is important to diversify your investment portfolio, and investing in debt instruments like bonds is one of the most versatile options out there.
There are high-yield bond funds for people who like the high risk/high reward type of investments. Government bond funds and ETF bond funds offer more stable, conservative, yet also promising investments.
According to Fidelity Investments, “for many investors, a bond fund is a more efficient way of investing in bonds than buying individual securities.
Bond mutual funds are just like stock mutual funds in that you put your money into a pool with other investors, and a professional invests that pool of money according to what he or she thinks the best opportunities are.”
Award Emblem: Best Bond Funds
In this brief article, we will look at some of the top rated bond funds available. Since there is quite a variety of the top bond funds, we will begin by comparing the differences between municipal bond funds and the best high-yield bonds funds.
We will then go on to look at the best corporate bond funds with an emphasis on the best high yield corporate bond funds. Lastly we will consider the top government bond funds and the top bond funds overall.
How Investing in the Best Bond Funds Can Financially Work for You
People who choose to invest in the best bond funds generally limit the amount of risk that would come if they were to invest in only one of the top rated bond funds.
By investing in a large number of individual bonds that have different maturity rates, the investor is protecting himself or herself from any fast decline in any one bond.
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As an investor, you can choose to create a top bond fund portfolio through investing in the top rated bond funds within one sector (for example the best high-yield corporate bond funds).
However, it is also a possibility to spread your investment over a wider area. Broad market bond funds allow you to invest in municipal bond funds, government bond funds, ETF bond funds, and the best corporate bond funds, among others.
Two other main perks that come with investing in bond funds are that you can buy or sell your fund shares each day when you invest in the best bond funds, and also, when managed correctly, you should be able to receive a steady monthly income from investing in bond funds.
Municipal Bond Funds Versus High-Yield Bond Funds
Many investors choose to invest in municipal bond funds because they represent a potentially tax-free income. Municipal bond funds generally have a lower tax burden that other types of top rated bond funds.
However, this doesn’t hold for wealthy investors who are in the top tax brackets.
Municipal bond funds are debt securities issued by local governments to finance their capital expenditures.
They are generally exempt from federal and state taxes. Below, we present the top three municipal bond funds on the market.
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TABS 5-to-15 Year Laddered Municipal Bond Fund (EALTX)
This municipal bond fund is completely exempt from federal income tax. Over 90% of its assets are in municipal obligations that have been rated as investment grade.
Over 30% of the assets of this municipal bond fund are tied up in education, while close to 20% is invested in state and local obligations and just over 10% is in the health sector.
Since its inception in 2010, this municipal bond fund has increased 22.26%, making it a great choice for investing.
Franklin CA High Yield Municipal A (FCAMX)
This municipal bond fund invests in higher-yield municipal securities in California; instead of focusing on buying and selling in quick turnaround, these high-yield bond funds hold on for the long run.
The monthly income from this municipal bond fund is exempt from income tax and has performed steadily, gaining just over 11% since its inception in 1993.
MainStay High Yield Municipal Bond A (MMHAX)
The last of our municipal bond funds invests in lower quality funds that offer the possibility of high yields in the future.
Over 65% of its portfolio is made up of bonds ranked as medium to low quality, and 10% of its assets are focused on municipal bonds in bankruptcy.
If you like high risk and the potential for high reward, then this high yield bond fund is for you as it has gained over 25% since inception in 2010.
There are other types of high-yield bond funds that don’t invest in municipalities and local governments.
The best high-yield bond funds can be found in a number of bond sectors, including high-yield corporate bond funds that we will consider in the next section. According to U.S. News:
“[H]igh-yield bond portfolios concentrate on lower-quality bonds, which are riskier than those of higher-quality companies. These portfolios generally offer higher yields than other types of portfolios, but they are also more vulnerable to economic and credit risk. These portfolios primarily invest in U.S. high-income debt securities where at least 65% or more of bond assets are not rated or are rated by a major agency such as Standard & Poor’s or Moody’s at the level of BB (considered speculative for taxable bonds) and below.”
The top two best high-yield bond funds that aren’t also municipal bond funds are listed below.
PIA High Yield Fund PHYSX
This high-yield bond fund prioritizes current income growth over long-term capital growth. Over 80% of its assets are made up of domestic and foreign high-yield bond funds, including foreign commitments and preferred stocks.
At just over $10 per share, this is one of the best high yield bond funds available for a decent price.
Federated Institutional High Yield Bond Fond FIHBX
This top rated bond fund has over $5 billion in assets. It has a diverse portfolio specializing in everything from emerging market debt securities to futures contracts.
Its current price is just under $10, making it also one of the best high-yield bond funds currently available.
Best Corporate Bond Funds
High-yield corporate bond funds are also known as junk bonds. The Security and Exchange Commission (SEC) of the U.S. government says that high-yield corporate bond funds
“offer a higher rate of interest because of its higher risk of default. When companies with a greater estimated default risk issue bonds, they may be unable to obtain an investment-grade bond credit rating. As a result, they typically issue bonds with higher interest rates in order to entice investors and compensate them for this higher risk.”
The two best corporate bond funds are summed up below.
Fidelity Short Duration High Income (FSAHX)
This top bond fund has only been around since 2013, but it offers the trusted name of the Fidelity Finance group. Last year, it gained close to 3% which was much higher than its competitors. It does, however, require a minimum investment of $2,500.
Eaton Vance Short Duration Strategies R (ERSIX)
The Eaton Vance Short Durante Strategies only requires a minimum initial investment of $1,000, making it a good option for first-time investors looking to learn about trading in the world of high-yield bond funds.
According to investorplace.com, “on the performance front, ERSIX beats over 95% of short-term bond funds for the one-, three- and five-year returns. Year-to-date, the fund is ahead of 97% of the category with a 2% gain.” This is one of the best high-yield bond funds for investors who want a sure return.
The Best Government Bond Funds
When it comes to government bond funds, you can invest in long-term, intermediate term, or short-term bond funds depending on your investment strategy and personal financial goals. Furthermore, government bonds can also come as ETF bond funds.
“Bond ETFs are very much like bond mutual funds in that they hold a portfolio of bonds and can differ widely in strategies, ranging from U.S. Treasuries to high yields, from long-term to short-term. Bond ETFs trade like stocks and are passively managed.”
Long government bond funds are mostly invested in bonds backed by the U.S. government, which minimizes the risk for the investor because it is highly unlikely that the government will default on its debt. They have durations of anywhere between six and ten years, however, and this can cause these bond funds to be more sensitive to interest rates.
A quality long government bond fund is Vanguard Extended Dur Trs Idx Fund VEDTX. This top rated bond fund has returned over 30% in the last year alone and has notably lower fees than other bond funds of the same category. It mainly tracks and invests in extended-duration, zero-coupon U.S. Treasury securities.
When it comes to intermediate government bond funds, the SEI GNMA (SDIT) has over 80% of its portfolio in mortgage-backed securities issued by the Government National Mortgage Association. It has returned close to 4% during the last year but offers a steady income over time.
Short-term government bond funds have effective maturities between 1 to 3 years, making them very safe investments as they won’t be affected by changing interest rates. One of the best short term government bond funds is the Shelton U.S. Government Securities Fund CAUSX.
This fund invests mostly in high-quality bonds whose interest is fully guaranteed by the United States government. It returned over 4% during the last year alone. If you are looking to invest in ETF bond funds backed by the U.S. government, there are two options that have the possibility of being quite lucrative. The iShares 7-10 Year Treasury Bond ETF has a 6.3% year-to-date return while the iShares 20 Year Treasury Bond ETF has a 16.8% year-to-date return. Either of these two options represent quality ETF bond funds to invest in.
The Top Bond Funds Overall
With so many options available, it can be difficult to settle on which bond funds to choose. Investing in bond funds can be frustrating because of the sheer amount of choices out there.
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Though it is difficult to determine the absolute best bond funds available, the following three funds are at the top of the list for many investors.
DoubleLine Total Return Bond N (DLTNX)
This is one of the best bond funds out there because it has an average duration of just under 3 years, offering quick income for investors. By investing in mostly mortgages (both government backed and privately held), this best bond fund can return over 3% annually to its investors.
Metropolitan West Unconstrained Bond (MWCRX)
If you plan to invest in riskier bond funds, then this is the best bond fund for you. The average duration was just 1.4 years, and one fourth of the assets of this fund were in junk rated securities. Year to date, this bond fund yields 2.5%.
Vanguard Limited-Term Tax Exempt (VMLTX)
One of the overall best bond funds out there is the Vanguard Limited Term Tax Exempt Bond. It only yields around 1% per year, but it is a safe investment without much risk if that is what you are looking for.
Investing in Bond Funds to Secure Your Financial Future
Investing in bond funds is a great financial decision. It allows the flexibility for the investor to choose between conservative and risky portfolios as well as offers a wide variety of investing sectors.
By researching the best bond funds out there, whether municipal bond funds, government bond funds, or high-yield bond funds, you will be able to prepare a secure and prosperous financial future.
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