5 Great Fixed-Income Funds to Buy Now - WTOP News (2024)

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In the aftermath of a challenging year for bonds in 2022 as interest rates rose, investors might be tempted to overlook the diversification benefits of bonds.

However, that could mean missing out on the historical resilience that bonds have shown in turbulent times. This can be seen by reviewing historical market data, especially during major market crises.

A great example is the performance of a balanced portfolio of 60% U.S. stocks and 40% aggregate bonds during significant downturns. During the 2008 financial crisis, this portfolio saw a decline of 32.6%. In the 2000 dot-com bubble, the drop was 22.4%, and during the March 2020 COVID-19 crash, it was 12.3%.

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While these numbers might seem discouraging at first glance, the situation for anyone fully invested in equities was considerably worse. In those same periods, 100%-equity portfolios experienced drawdowns of 44.8%, 51% and 19.6%, respectively.

These three major market crises illustrate the stabilizing role that bonds can play in a diversified portfolio. They not only offer a counterbalance to equities in times of market stress but also provide a source of regular income and capital preservation.

This historical perspective makes a strong case for continuing to include bonds as an integral component of a diversified investment strategy. For investors looking to incorporate fixed income into their portfolios without the complexity of buying individual bonds, mutual funds and exchange-traded funds, or ETFs, are excellent options.

“Given the higher risks and costs associated with portfolios of individual bonds, and the time they take to manage, most investors are better served by low-cost mutual funds and ETFs,” says Chris Tidmore, senior manager at Vanguard’s Investment Advisory Research Center. “This is particularly true in the case of municipal and corporate bonds, which are less liquid and harder to purchase than Treasury bonds.”

These vehicles allow for quick diversification across various bonds, offer monthly distributions, and provide easy access to vital fixed-income metrics such as duration and yield to maturity. By using a mutual fund or ETF, you can efficiently add a layer of stability to your investment portfolio, positioning yourself to weather market volatility more effectively.

Here are five great fixed-income funds to buy in 2024:

Vanguard Total World Bond ETF (BNDW)

“The main benefit of bond funds for investors is convenience,” Tidmore says. “Bond funds offer significant time savings over building and managing portfolios of individual bonds yourself and allow investors to build a broadly diversified bond portfolio with only a few funds.”

Today, one of Vanguard’s most diversified and affordable bond ETFs investors can buy is BNDW, which tracks the Bloomberg Global Aggregate Float Adjusted Composite Index for a 0.05% expense ratio.

BNDW is actually an “ETF of ETFs,” wrapping two other bond ETFs in equal proportions: the Vanguard Total Bond Market ETF (BND) and the Vanguard Total International Bond Market ETF (BNDX), respectively. This gives BNDW exposure to more than 17,700 bonds averaging a yield to maturity of 4.6%, which is the theoretical return expected if all of these bonds were held until maturity. It has a duration of 6.8 years, implying intermediate interest rate sensitivity.

iShares Core Total USD Bond Market ETF (IUSB)

“Some of the best bond ETFs have low fees, track close to their net asset value, have very tight bid-ask spreads of a penny or less and performance that closely hugs its benchmark,” says Michael Ashley Schulman, partner and chief investment officer at Running Point Capital Advisors. A great example is IUSB, which tracks the Bloomberg U.S. Universal Index. Currently, this ETF features a small 30-day bid-ask spread of just 0.02%, an indicator of excellent liquidity.

The index tracked by IUSB not only features the usual exposure to U.S. government Treasurys, mortgage-backed securities and investment-grade bonds, but also has a small 6% allocation to non-investment-grade bonds. Also known as high-yield or “junk” bonds, these have greater credit risk, but pay higher yields. Overall, investors can expect a 5% average yield to maturity against a 5.8-year duration. IUSB charges a 0.06% net expense ratio.

Global X 1-3 Month T-Bill ETF (CLIP)

“CLIP offers pure exposure to one-to-three-month zero-coupon Treasury bills, or T-bills, which are purchased at a discount and mature at par,” says Rohan Reddy, director of research at Global X ETFs. “Thanks to its ultra-short duration focus and the explicit U.S. government guarantee underpinning its holdings, CLIP carries negligible interest rate and credit risk, making it an excellent tactical allocation for investors seeking to wait out market volatility.” At a 0.07% expense ratio, this ETF is very affordable.

With short-term rates remaining elevated at present, the holdings in CLIP are currently paying an average yield to maturity of 5.4%, against a low duration of 0.1 year. This makes the ETF a great way to earn safe monthly income. “While money market funds often introduce credit risk in the form of holdings like commercial paper, CLIP invests 100% of its holdings in T-bills, thereby providing one of the most straightforward and transparent strategies for an investor’s short-term cash allocation,” Reddy says.

[5 Top Income Investments for 2024]

Schwab U.S. Aggregate Bond Index Fund (SWAGX)

Fixed-income investors looking for the convenience of a mutual fund, especially in 401(k) plans where ETFs are not readily available, may prefer something like SWAGX. This Schwab bond fund is highly accessible thanks to a combination of no-minimum-required investments, no 12b-1 fees and a rock-bottom 0.04% expense ratio. It provides broad exposure to both U.S. government and investment-grade corporate bonds by tracking the popular Bloomberg U.S. Aggregate Bond Index.

Currently, SWAGX’s portfolio of 8,900-plus bonds averages out to a yield to maturity of 5.4% and duration of six years. This fund also pays monthly distributions, which are categorized as ordinary income and thus taxed at an investor’s marginal rate. Hence, SWAGX isn’t quite tax-efficient, and is best held inside of a tax-sheltered account like a 401(k), health savings account or Roth IRA. In a taxable brokerage account, high-income investors can experience a substantial tax drag.

Fidelity Municipal Bond Index Fund (FMBIX)

High-income investors using a taxable brokerage account can opt for a municipal bond fund like FMBIX to minimize tax drag. This mutual fund tracks the Bloomberg Municipal Bond Index via a sampling technique, picking and choosing a representative portion of its underlying securities to replicate it. As a result, the bonds held by FMBIX pay interest income that is exempt from federal income tax but may be subject to the federal alternative minimum tax.

Like most Fidelity mutual funds, FMBIX is highly accessible. It has no transaction fees, no minimum investment requirement and charges a low 0.07% expense ratio. Investors can currently expect a 30-day SEC yield of 3.3%, which Fidelity claims is equivalent to a 5.5% yield with taxes levied. However, this fund is fairly new, with an inception date of July 2019, and has only $155 million in assets under management, or AUM.

[SEE: 9 of the Best Bond ETFs to Buy Now.]

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5 Great Fixed-Income Funds to Buy Now originally appeared on usnews.com

Update 01/25/24: This story was previously published at an earlier date and has been updated with new information.