5 Best Bond Funds for Retirement

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.

[Sign up for stock news with our Invested newsletter.]

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 funds out there and what they have to offer:

Bond Fund Trailing-12-Month Yield
iShares iBonds Dec 2026 Term Corp. ETF (ticker: IBDR) 3.7%
Fidelity Capital & Income Fund (FAGIX) 5.3%
Dodge & Cox Global Bond Fund (DODLX) 3.7%
Kensington Managed Income Fund (KAMIX) 4.4%
Sierra Tactical Bond Fund (STBNX) 5.0%

*As of May 14 close.

iShares iBonds Dec 2026 Term Corp. ETF (IBDR)

While it’s impossible to pinpoint a single “best” bond fund for all investors since everyone’s needs and objectives are different, certain strategies can be better than others.

“One thing we’ve been working with clients on is implementing defined-maturity ETFs for fixed-income exposure,” says Chris Berkel, investment advisor and president of AXIS Financial in Edmond, Oklahoma. Defined-maturity exchange-traded funds aim to combine the diversification of a bond fund with the certainty of investing in individual bonds and knowing you’ll get your full principal back at maturity.

This lets investors “ride down the yield curve, or control duration and maturity exposures, which can be tailored to annual distribution needs,” Berkel says. “The downside is that they don’t offer very long maturities currently.”

IBDR, for example, matures in 2026, which means the fund will terminate on or about Dec. 15, 2026, at which point the net assets will be divvied up among investors. It does this by investing only in bonds with maturities between Jan. 1, 2026 and Dec. 15, 2026. In the meantime, it pays a 3.7% trailing 12-month yield through monthly distributions, with the exception of January since investors receive a double distribution in December each year.

Fidelity Capital & Income Fund (FAGIX)

When looking toward retirement, investors aim to not only generate income but also watch their investments grow. This is where FAGIX tosses its hat in the ring. The fund aims to provide both capital appreciation and income.

It does this by adding equities into a predominantly corporate bond portfolio. Presently, it has just over 70% in bonds — mostly corporate bonds with some bank debt thrown in for good measure. Just under 20% of the portfolio is in equities and the remaining 10% or so of the portfolio is in cash.

Staying true to its dual objectives, FAGIX is willing to seek out troubled companies. Its strategy is to invest “with an emphasis on lower-quality debt securities” and “in companies in troubled or uncertain financial condition.” This makes it a high-risk fund relative to its Morningstar category. But it has also generated above-average returns, as evidenced by the 5.3% trailing 12-month yield.

Morningstar’s analysts are optimistic about the fund’s future. They give it five stars and a bronze medal, indicating they’re confident it will outperform its peers or index over a market cycle.

Dodge & Cox Global Bond Fund (DODLX)

Another Morningstar top-rated fund is DODLX. Morningstar gives it five stars and a gold badge thanks to its “patient and disciplined approach, strong and experienced leadership, and attractive fees,” writes Morningstar Fixed-Income Strategies Director Mara Dobrescu.

DODLX emphasizes corporate debt whereas its global bond peers tend to focus on sovereign debt, Dobrescu adds. An emphasis on corporate bonds tends to lead to higher returns, as evidenced by the fact that DODLX has consistently outperformed its peers since 2016 — in both up and down markets. In fact, the fund earned nearly double the returns of its category in 2023.

“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,” Dobrescu writes. “The process leads to a concentrated portfolio with high-conviction holdings, including large allocations to emerging markets — around a fourth of assets historically.”

Despite this, Morningstar still considers it to have average risk relative to its peers, which is paired with high relative returns.

[READ: These 3 Fund Families Control 74% of the Market]

Kensington Managed Income Fund (KAMIX)

“One of my top bond funds for retirement is the Kensington Managed Income Fund,” says Ronnie Thompson, investment advisor representative and owner of True North Advisors in Northville, Michigan. “KAMIX is a valuable tool to guard against the threat of persistent inflation and rising interest rates, which have beleaguered investors seeking fixed-income opportunities.”

He likes it for its unique investment strategy that lets the fund managers adjust their approach based on market conditions. During positive market cycles, they’ll lean more into higher-yielding bonds, and in negative or volatile markets, shift more toward Treasurys, government securities and cash equivalents. This combination of leaning into high risk-reward in good times and focusing on protection in bad times has helped the fund outperform a typical buy-and-hold strategy over the long term, Thompson says.

The managers’ efforts have resulted in a 4.4% yield, but this is mitigated somewhat by the above average 1.52% expense ratio. The high fee level and poor parent company rating compared to industry peers leads Morningstar to give the fund only two stars and a neutral rating.

“Paying a premium for active management, especially ones like Kensington with an active risk-off from the markets in this environment, can potentially be a winning formula for avoiding unexpected drawdowns,” Thompson says.

Sierra Tactical Bond Fund (STBNX)

Bond investors today are in a tight spot. “It could be argued that interest rates should be increased to combat inflation, which would result in bond prices falling,” says John Jones, investment advisor representative at Heritage Financial in Newberry, Florida. Conversely, “if interest rates were to reduce, bonds prices would experience appreciation.”

In such an uncertain environment, he says taking a tactical approach to bond investing is paramount. To this end, he likes the Sierra Tactical Bond Fund.

STBNX operates with a dual objective of providing total return while minimizing downside risk. They do this through a combination of riskier high-yield corporate bonds and stable U.S. Treasurys. In theory, at least. In reality, the portfolio is entirely high-yield corporates at the moment. Despite this, Morningstar considers it average relative to the nontraditional bond category.

The fund has held up to its promise of reducing downside risk, avoiding two-thirds of the category index’s declines, according to Morningstar. It has also provided a nearly 5% trailing 12-month yield.

This level of oversight comes at a high cost, however. The investor class of the fund charges a 1.92% expense ratio. If you’re lucky enough to have this fund in your employer-sponsored plan, you may be able to own the institutional share class (STBJX), which charges a relatively slight 1.68%.

More from U.S. News

7 Best Large-Cap ETFs to Buy in 2024

6 High-Risk Stocks for Aggressive Investors

7 of the Best Tax-Free Municipal Bond Funds

5 Best Bond Funds for Retirement originally appeared on usnews.com

Update 05/15/24: This story was published at an earlier date and has been updated with new information.

Federal News Network Logo
Log in to your WTOP account for notifications and alerts customized for you.

Sign up