Bond Fund Picks for a Rising Interest-Rate Environment
Jeremy Glaser: The Fed looks set to raise interest rates this week, and although no one knows what the future pace of increases will look like, many investors are looking for bond portfolios that can withstand a rising rate environment. We asked Morningstar analysts to share three of their top picks.
Phillip Yoo: Vanguard Short-Term Bond Index is a good option for conservative yet short-duration fixed-income exposure that provides more income than comparable Treasury bonds. The fund tracks the Bloomberg Barclays US 1-5 Year Government/Credit Float Adjusted Index, and has a good indexing tracking record. The portfolio holds about 60% of U.S. Treasury bonds and 40% investment-grade credits, allowing it to offer a yield of 1.9%. Over the last three years, the fund returned about 1.4% annually, which lagged its peers, who took on more credit risk over the same period. Finally, its fee is at 7 basis points, which is hard to beat.
Beth Foos: Funds in Morningstar's Muni National Short category generally take on less interest-rate risk than the typical National Muni Bond Fund. With that, they're likely to see less of an impact on returns if interest rates were to rise. One of the funds that stands out in this category is Fidelity's Limited-Term Muni Income Fund. This is a Gold-rated, 5-star fund that benefits from an experienced management team that follow a really straightforward approach to putting this portfolio together. They generally avoid things that add volatility, like leverage, and they use a solid bottoms-up research approach to finding value in the marketplace. That's resulted in solid, long-term performance over the past decade. Investors that are worried about the rise in interest rates, as well as looking for some tax efficiencies, should give this one a look.
Emory Zink: Silver-rated Baird Short-Term Bond Fund exhibits a number of characteristics that make it a compelling offering in its category, regardless of where the Federal Reserve takes interest rates. First, the team manages duration close to the fund's Bloomberg Barclays US Government Credit 1-3 Year Index, eschewing aggressive interest-rate calls as a source of return. Second, there is a policy of absolutely no derivatives or leverage in the fund, which limits volatility versus more aggressive peers. Third, the fees on this fund are some of the lowest in the category, and in a category where yields are already quite low, this gives the fund an advantage over competitors who have a much higher price hurdle that they have to overcome. Those short-term bond funds are, by design, less vulnerable to broad market moves. This particular fund within this category is thoughtfully structured to remain resilient, regardless of where the Federal Reserve takes interest rates.