How the Largest Bond Funds Did in Q3 2024

The Federal Reserve’s long-awaited interest rate cut changed dynamics in the bond market, consequently changing the leadership among the largest bond mutual funds and exchange-traded funds. Instead of short-term bond funds and credit-focused strategies leading returns, funds more sensitive to interest rates were at the front of the pack.

“High-yield bonds, floating rate, and leveraged loans fared well during 2022 and 2023, while longer-duration, higher-quality bonds got hit the hardest,” explains Morningstar senior manager research analyst Tom Murphy. “This quarter, you’ve kind of seen a reversal.”

The overall bond market as measured by the Morningstar US Core Bond Index returned 5.2% for the quarter. The Morningstar US Corporate Bond Index, which measures investment-grade corporate bonds, returned 5.8%, beating the 5.3% from the Morningstar US High Yield Bond Index. Some of the highest returns were from the rate-sensitive longer-term treasuries, with the Morningstar US 10+Year Treasury Bond Index returning 7.8%.

“The Fed has cut its short-term rate, and longer-term rates have followed it lower during the quarter. So that helps support strong returns in high-quality, long-duration bonds. US Treasuries, agency mortgages, and investment-grade corporate bonds led the way,” says Murphy.

Here’s a look at how the largest active US stock funds—both actively and passively managed—performed in the third quarter of 2024. Performance data for this article was based on the lowest-cost share class for each fund. Some funds may be listed with share classes not accessible to individual investors outside retirement plans. The individual investor versions of those funds may carry higher fees, which reduces returns to shareholders. For longer-term returns, if a share class was launched more recently than the period mentioned, an older share class was substituted if available.

Q3 Performance for the Largest Active Bond Funds

The $84 billion Dodge and Cox Income Fund DOXIX had the highest total return of the 10 biggest active bond funds, with a 5.6% gain. It ranked 14th percentile in the US intermediate core-plus bond category. In September commentary, Morningstar’s Mara Dobrescu wrote: “The team also brought its duration in line with the Bloomberg US Aggregate Bond Index’s after being consistently underweight in recent years, based on the belief that both rates and inflation should decrease over the next three to five years.”

Ranked highest in its category was the $55 billion Vanguard Short-Term Investment Grade Fund VFSIX, which clocked in at the 14th percentile of the US short-term bond category. However, since short-term bonds significantly underperformed as rates fell, the fund’s 3.8% return was the second-worst of the 10 largest active funds. The lowest return came on the $75 billion Vanguard Intermediate Term Tax-Exempt Bond Fund VWIUX, which returned 2.7%. However, being tax-exempt, its effective total return may be higher, depending on an investor’s tax situation.

Q3 Performance for the Largest Passive Bond Funds

The $61 billion iShares 20+ Year Treasury Bond ETF TLT returned 7.9% for the quarter, the most of the 10 largest index funds, landing it in the 38th percentile of the long government category. The $59 billion Vanguard Short-Term Bond Fund BSV ranked highest in its category out of the 10, placing in the 24th percentile among short-term bond funds. The worst performer was the $53 billion Vanguard Short-Term Inflation-Protected Securities ETF VTIP, which returned 2.5%, followed by the Vanguard Short-Term Bond ETF, which returned 3.5% as shorter-term funds underperformed amid falling rates.

Long-Term Performance of the Largest Active Bond Funds

The fund with the largest difference between its five-year and quarterly performances was the PIMCO Income Fund PIMIX which ranked in the 21st percentile in its category over the past five years but in the 47th percentile in the third quarter.

Long-Term Performance of the Largest Passive Bond Funds

The change in the interest rate backdrop can be seen in returns on the iShares 20+ Year Treasury Bond ETF. It’s had an annualized return of negative 9.5% over the past three years, but in the third quarter, it gained 7.9%, demonstrating how longer-duration funds magnify the effect of rate changes.