Be selective as yields have fallen.
Fixed-income vehicles still remain an important part of retirees’ portfolios, even as yields are down after the Federal Reserve lowered interest rates and bought bonds to mitigate the economic impact of the pandemic. Because of that, retirees have to be selective when adding bond funds. Clayton DeGiacinto, managing partner and chief investment officer at Axonic Capital, says investors need to look at both bond yields and the inflation rate before buying a bond fund. If a bond yield is lower than the Consumer Price Index — an inflation gauge — it means they have negative purchasing power because they are not beating inflation. “If they want to own fixed-income assets, they will have to own bonds or securities that pay them a higher rate,” he says. Here are eight of the best bond funds for retirement.
Invesco National AMT-Free Muni Bond ETF (PZA)
PZA tracks an index of investment-grade, U.S. municipal bond debt. Josh Simpson, financial advisor with Lake Advisory Group, says his firm uses the fund for the tax-free income it provides retirees. “We’ve used it for years,” Simpson says. “It’s not something that moves a lot as far as the price goes, and it’s a consistent payer.” PZA invests in bonds with 15 years remaining to maturity and holds mostly revenue bonds. Because of the longer maturities, yields are slightly higher than other muni bond exchange-traded funds, with average credit risk. It has an expense ratio of 0.28%, which represents $28 annually for every $10,000 invested, and a yield of 2.7%.
Vanguard Intermediate-Term Bond ETF (BIV)
Simpson says his firm uses BIV in tax-deferred retirement accounts, such as individual retirement accounts. This ETF tracks an index that covers the entire investment-grade fixed-income market, including U.S. government, corporate and international dollar-denominated bonds. The maturities range from five to 10 years. The fund has 2,040 securities in its portfolio and $35 billion in assets under management. The year-to-date total return is 8%. Compared with similar bond ETFs, BIV has a higher number of U.S. Treasury notes because it takes a market-value weighting approach and it doesn’t include agency mortgage-backed securities. It also comes with an expense ratio of 0.05%.
Nuveen Select Tax-Free Income Portfolio (NXP)
Chuck Self, chief investment officer for iSectors, says he likes NXP for retirement accounts. For investors who are in higher tax brackets and not dependent on the day-to-day movements in a fund, NXP can be a good choice because these investors can afford to take a little extra market price risk. Holdings in the fund have an average maturity of about 20 years, so it is subject to more volatility. “To get 3.5% tax-free is pretty nice, especially when you get less than 1% in Treasurys,” Self says. NXP is a closed-end fund with little leverage, which is rare for a closed-end fund, he says. Self warns against investors trying to get more yield with riskier bonds, pointing to the March sell-off. “I encourage investors to think about the downside risk of any bond funds that they buy,” he adds.
First Trust Low Duration Opportunities ETF (LMBS)
LMBS holds mortgage-backed securities with an average duration of less than three years. It holds a variety of bonds including agency, nonagency-backed and commercial mortgage-backed securities. Self says this is a good fund for investors who are concerned about rising interest rates, and with 90%-plus government securities, there are few credit-risk worries. He points out LMBS’ total return was flat in the first quarter, being one of the few non-Treasury bond funds to not lose money during the market sell-off. At 0.67%, it has a slightly higher expense ratio for an ETF, Self says, but he points out that’s because it’s an actively managed ETF. It has $5.6 billion in assets under management and a yield of 2.2%.
Fidelity Total Bond ETF (FBND)
An actively managed ETF, FBND uses the Bloomberg Barclays U.S. Universal Bond Index as a way to guide its sector allocation and duration exposure. Marc Pfeffer, chief investment officer at CLS Investments, says the managers try to keep the duration fairly neutral to the broader Bloomberg Barclays U.S. Aggregate Bond Index, a key bond benchmark. “They’ve done a fairly good job navigating through this crisis,” he says. FBND uses the same management team and strategy of the Fidelity Total Bond Fund (FTBFX). Holdings include up to 20% high-yield bonds, plus U.S. Treasurys, mortgage-backed securities and corporates, among other securities. The fund’s expense ratio is 0.36%.
PIMCO Active Bond ETF (BOND)
Pfeffer says BOND can be a good choice for a core fixed-income holding, as it has a diversity of holdings and a solid yield. It’s an actively managed ETF, so its expense ratio is higher than a benchmark ETF like the iShares Core U.S. Aggregate Bond ETF (AGG), but the 12-month yield of 3.1% more than makes up for the price of 0.73% annually. It holds bonds with a duration around five years — short enough that if rates go down, investors are protected, but long enough to have a decent yield. “It’s held up pretty well this year,” Pfeffer says, noting it has a positive total return this year.
SPDR Blackstone/GSO Senior Loan ETF (SRLN)
SRLN got hit “very hard” during the spring downturn, but the fund has rebounded since, Pfeffer says. Year to date, it’s down 4.8% — though it’s up about 22% since March. For investors willing to take on additional risk for higher yield, SRLN could still be a good choice. It’s an actively managed bond fund that has exposure to domestic and foreign noninvestment-grade, floating-rate senior loans. The fund has a very short duration as it resets every three months. Most of the price appreciation is likely in the return, but the yield is strong at 5.4%. The expense ratio is 0.7%. Investors “still have to be cautious overall, but if you’re willing to take risk, that’s a good place,” he says.
VanEck High-Yield Municipal ETF (HYD)
For aggressive investors seeking tax-free income, Pfeffer chooses HYD, which tracks a market-weighted index of high-yield, long-term, tax-exempt municipal bonds. It has a duration of 6.97 years, with $2.8 billion in AUM, which makes it a very liquid fund. “Municipality defaults remain extremely low,” he says. “However, there is a heightened sense of credit risk in the muni market since the (pandemic) panic.” Pfeffer believes the spring sell-off in the muni market was overdone. Although the fund is down nearly 6% year to date, it’s up about 38% in the last few months. HYD’s 12-month yield is 4.4%, and its expense ratio is 0.35%.
Eight bond funds for retirement:
— Invesco National AMT-Free Muni Bond ETF (PZA)
— Vanguard Intermediate-Term Bond ETF (BIV)
— Nuveen Select Tax-Free Income Portfolio (NXP)
— First Trust Low Duration Opportunities ETF (LMBS)
— Fidelity Total Bond ETF (FBND)
— PIMCO Active Bond ETF (BOND)
— SPDR Blackstone/GSO Senior Loan ETF (SRLN)
— VanEck High-Yield Municipal ETF (HYD)
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Update 07/13/20: This story was published at an earlier date and has been updated with new information.