Bonds make up the foundation of most successful retirement portfolios. 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.
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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.
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 a few dollars behind big-ticket loans to corporations, banks and the government.
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 mutual funds out there and what they have to offer:
| Bond Fund | 30-day SEC yield* |
| Dodge & Cox Income Fund (ticker: DODIX) | 4.6%** |
| Fidelity Inflation-Protected Bond Index Fund (FIPDX) | -0.10% |
| Vanguard Intermediate-Term Bond Index Admiral Shares (VBILX) | 4.4% |
| Dodge & Cox Global Bond X (DODLX) | 5.0%** |
| Fidelity Tax-Free Bond (FTABX) | 3.5% |
*As of Jan. 24, 2024. **As of Dec. 31, 2023.
Dodge & Cox Income Fund (DODIX)
When looking toward retirement, investors aim to not only preserve capital but to watch their investments grow. This is where DODIX tosses its hat in the ring. DODIX aims to combine a high and consistent rate of current income while taking advantage of opportunities to maximize growth.
DODIX is an actively managed core fixed-income fund comprised primarily of investment-grade debt securities. Opportunities in other areas are also present in the fund, such as debt of non-U.S. issuers and individual securities based on fundamental research.
DODIX has an “adept investment team and robust investment approach,” which alongside minimal fees, makes it a tough fund to beat, writes Morningstar manager research analyst Sam Kulahan.
Kulahan notes the fund tends to favor corporate bonds — which account for nearly one-third of the portfolio — and operates a compact, mostly cash-bond portfolio that is primarily securitized debt. With these features, it’s no surprise this fund features a 4.6% 30-day SEC yield.
Morningstar gives DODIX five stars and a gold badge, indicating that analysts believe this fund will outperform a relevant index or most of its peers over a market cycle.
Fidelity Inflation-Protected Bond Index Fund (FIPDX)
FIPDX is a fund created for those looking to hedge against inflation. It aims to provide investment outcomes that correspond to the total return of the inflation-protected sector of the U.S. Treasury market. It does this by investing at least 80% of assets in inflation-protected debt securities included in the Bloomberg U.S. Treasury Inflation-Protected Securities (TIPS) Index.
TIPS adjust their principal amount as the consumer price index (CPI) changes. If inflation, and thus the CPI, rises, the principal on the bond will also increase. This can be a boon for retirement investors who must combat the erosion of purchasing power caused by rising inflation.
Using primarily Treasury-backed securities also means there is low risk of default within the fund. That said, Morningstar associate analyst Mo’ath Almahasneh notes that “risk and reward are highly correlated in the fixed-income market, so there is an opportunity cost associated with TIPS because their muted credit risk will likely yield low inflation-adjusted returns over the long run.” This is evidenced by its currently negative 30-day SEC yield, as of Jan. 24.
Though it features average returns, FIPDX has the lowest expense ratio of funds on this list sitting at 0.05%. Unlike many of its competitors, this fund does not require a minimum investment.
Morningstar gives the fund four stars and a silver badge.
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Vanguard Intermediate-Term Bond Index Admiral Shares (VBILX)
VBILX is a great option for Goldilocks investors who don’t want to get locked into bonds with term lengths that are too long but also don’t want investments with term lengths that are too short. The fund invests in a sweet spot of U.S. bonds with maturities between five and 10 years. Being a passive fund means it does this for a low expense ratio of 0.07%.
While it’s by and large a government bond fund with more than 55% of assets invested in U.S. government debt, it covers the full spectrum of investment-grade corporate debt, too, with just over one-fifth of assets in the lowest level of investment-grade, BBB.
Morningstar gives the fund’s process, management and parent company all above-average ratings. This is despite the fund having only one manager, which can expose it to key person risk, or a risk of being dependent on too few people. But Morningstar’s analysis notes that the manager, Joshua Barrickman, has “built history managing the strategy, (and) it has not changed hands within the last five years.”
VBILX has 2,154 bonds in the portfolio currently and more than $37 billion in assets. The fund comes with a 4.4% 30-day SEC yield, making VBILX all the more enticing for retirees.
Morningstar gives it four stars and a gold badge.
Dodge & Cox Global Bond Fund (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 24 countries, the fund “benefits from a patient and disciplined approach, strong and experienced leadership, and attractive fees,” Kulahan writes.
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 5% 30-day SEC yield. This corporate bias can help the fund during rate shocks by providing lower interest rate sensitivity than funds with more government debt, according to Kulahan.
“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,” he writes. “The process leads to a concentrated portfolio with high-conviction holdings, including large allocations to emerging markets.”
More than 21% of the current holdings are emerging market issuers, but Morningstar still considers it to have moderate risk.
Morningstar gives DODLX five stars and a gold badge.
Fidelity Tax-Free Bond (FTABX)
For retirees looking to manage their taxable income, Fidelity’s Tax-Free Bond could be a sound choice. The fund normally puts at least 80% of assets in investment-grade municipal securities, meaning the fund’s associated income is exempt from federal taxes.
“Fidelity Tax-Free Bond is managed by a capable and collaborative team that follows a consistent and distinctive approach. It has served investors well over the long term,” writes Morningstar associate director Elizabeth Foos.
This is reflected in its 3.5% 30-day SEC yield. With a low expense ratio of 0.25%, investors can expect to keep more of the fund’s returns in their own pockets, free of federal income tax. One caveat with FTABX is its $25,000 minimum investment. But investors may find that the tax benefits outweigh the hefty costs to get started.
Morningstar gives this fund four stars and a gold badge.
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5 Best Bond Funds for Retirement originally appeared on usnews.com
Update 01/26/24: This story was previously published at an earlier date and has been updated with new information.
