Bonds make up the foundation of any successful retirement portfolio. These assets are debt-related instruments issued by governments and corporations that are looking to raise money. Think of them as the other side of the loan, where the “issuer” is the borrower and investors are collectively the lender.
Like any loan, bonds carry interest payments in addition to repayment of the principal amount — meaning this asset can provide a steady stream of cash back to investors. This makes them incredibly appealing, particularly for older investors looking for income to replace their paychecks once they stop working. They also tend to be much less volatile than stocks, making bonds ideal for capital preservation in retirement.
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Unfortunately, building a diversified portfolio of individual bonds can be a complicated and opaque process. But thankfully, bond funds have democratized access to fixed-income markets by allowing even small-time investors to put as little as $100 behind the big-ticket loans to the U.S. Treasury department and leading banks, manufacturers and tech companies.
Not all bond funds are the same, however, and while they are easy to buy, they are also easy for retirement investors to misunderstand. Here’s a brief rundown of some of the top bond investments out there, including both mutual funds and exchange-traded funds, or ETFs, and what they have to offer:
| Bond fund | Yield (trailing-12-months) |
| Vanguard Intermediate-Term Bond Index Admiral Shares (ticker: VBILX) | 2.7% |
| Vanguard High-Yield Corporate Investor Shares (VWEHX) | 5.5% |
| Baird Municipal Bond Fund (BMQSX) | 2.9% |
| iShares TIPS Bond ETF (TIP) | 4.3% |
| Dodge & Cox Global Bond X (DODLX) | 4.9% |
Vanguard Intermediate-Term Bond Index Admiral Shares (VBILX)
A good place to begin building a bond portfolio is with an intermediate core bond fund, which is exactly what VBILX is.
The fund tracks the Bloomberg U.S. 5-10 Year Government/Credit Float Adjusted Index to provide broad exposure to investment-grade bonds from U.S. issuers with maturities between five and 10 years. Being a passive fund means it does this for a rock-bottom expense ratio of 0.07%.
While it is by and large a government bond fund at more than 57% of assets, it covers the full spectrum of investment-grade corporate debt, too, with as much as one-fifth of assets in the lowest level of investment-grade, BBB. Lower-rated debt can provide higher yields, which contributes to the fund’s 2.7% trailing 12-month yield.
It has 2,710 issues in the portfolio currently and $36 billion in assets. Morningstar gives it four stars and a gold badge, indicating the analysts have the most conviction that this fund will outperform a relevant index or most of its peers over a market cycle.
Vanguard High-Yield Corporate Investor Shares (VWEHX)
If you’re willing to take on more risk for potentially higher yield, you need a high-yield fund like VWEHX. The fund looks below investment grade to medium- to lower-quality bonds, commonly referred to as “junk bonds.” That said, Vanguard does try to pick the higher-rated of the bunch in an effort to produce consistent income without excessive risk of default or principal loss.
The flip side to this more conservative approach is a limited upside, which can be seen in lower returns so far this year. The fund pays a handsome monthly distribution, however, with a trailing 12-month yield of 5.5%.
It has a portfolio of 810 bonds with average coupons of 5.1% and a rock-bottom expense ratio of 0.23%, compared to the category average of 0.76%.
Morningstar gives it four stars and a gold badge.
Baird Municipal Bond Fund (BMQSX)
Municipal bonds can be great income options for retirees trying to manage taxes because the interest is usually exempt from federal taxes and sometimes also state and local taxes. Just be aware that the interest on some muni bonds is still subject to the alternative minimum tax, or AMT.
The Baird Municipal Bond Fund is a solid choice for tax-conscious investors. The fund’s managers invest alongside the shareholders, so they have skin in the game, too.
The portfolio of more than 300 bonds is largely in AA- or A-rated bonds, though it does hold more BBB and non-investment-grade bonds than the Bloomberg Municipal Bond Index. This willingness to take on more credit risk than peers can make it a strong runner during bull markets, according to Morningstar’s research team. This has certainly been the case. Since its inception in late 2019, BMQSX has beat the benchmark by more than 2%. It even outperformed the index in the unfavorable bond market of 2022, despite the fact that a riskier strategy can lead to great downside loss.
Morningstar gives BMQSX five stars and a gold badge.
iShares TIPS Bond ETF (TIP)
An increasingly popular tool to hedge the risk of inflation in these challenging times is Treasury inflation-protected securities, or TIPS. These unique bonds have a direct tie to the rate of inflation as measured by the consumer price index. When inflation rises, the bond’s principal rises proportionately so that longer-term investors can retain their purchasing power.
Over the past 12 months, this fund has averaged a yield of 4.3%, but over the past 30 days it’s yielded 7.5%. Of course, if inflation crashes again, then the yield will crater, too. But if your strategy is to offset inflation rather than to latch on to the highest yields, TIP may be worth a look.
It has an expense ratio of 0.19% and $21.3 billion in assets. Morningstar gives it four stars and a bronze badge, which indicates the analysts’ confidence that the fund will outperform an index or most peers over a market cycle.
Dodge & Cox Global Bond X (DODLX)
Diversification is as important in your bond portfolio as it is in your stock portfolio. As a global bond fund, DODLX is a good option for gaining international fixed-income exposure.
With a portfolio covering 22 countries, the fund “benefits from a patient and disciplined approach, strong and experienced leadership, and attractive fees,” writes Morningstar Senior Analyst Sam Kulahan.
It emphasizes corporate debt whereas its peers tend to focus on sovereign debt, Kulahan adds. An emphasis on corporate bonds tends to lead to a higher yield, as evidenced by the high 4.9% trailing 12-month yield. This corporate bias can help the fund during rate shocks by providing lower interest rate sensitivity than funds with more government debt.
“Dodge & Cox employs a team of industry, credit and macro analysts to find the companies, sectors and currencies that are most appropriate for this strategy’s global mandate,” Kulahan writes. “The process leads to a concentrated portfolio with high-conviction holdings, including large allocations to emerging markets.” More than one-quarter of the current holdings are emerging market issuers, but Morningstar still considers it below-average risk.
Morningstar gives DODLX five stars and a gold badge.
[READ: 7 Best Emerging-Market ETFs]
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5 Best Bond Funds for Retirement originally appeared on usnews.com
Update 07/13/23: This story was published at an earlier date and has been updated with new information.
