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 funds out there and what they have to offer:
| Bond Fund | Expense Ratio | Trailing 12-Month Yield |
| Dodge & Cox Income I (ticker: DODIX) | 0.41% | 4.2% |
| Fidelity Capital & Income Fund (FAGIX) | 0.69% | 5.1% |
| Dodge & Cox Global Bond Fund (DODLX) | 0.45% | 4.2% |
| Manning & Napier High Yield Bond W (MHYWX) | 0.11% | 7.9% |
| Fidelity Series 0-5 Year Inflation-Protected Bond Index (FSTZX) | 0.0% | 4% |
Dodge & Cox Income I (DODIX)
The Dodge & Cox Income bond fund is a great option if you’re looking for a bond fund to serve as the core component of your fixed-income portfolio. It strives for a “high and stable rate” of income for investors while preserving your capital.
The fund focuses on investment-grade debt, which can include everything from government to corporate bonds, as well as mortgage-backed securities. The current allocation is nearly 18% U.S. Treasurys and nearly 30% corporate bonds. This makes it a fairly conservative choice, according to Morningstar. But it also manages to be one of the highest-returning Intermediate Core-Plus Bonds.
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. Currently, it has just over 60% in bonds — mostly corporate bonds with some bank debt thrown in for good measure. About 23% of the portfolio is in equities, and the remainder 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 5.1%-trailing 12-month yield.
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Dodge & Cox Global Bond Fund (DODLX)
Diversification is key in any retirement portfolio, so adding some global fixed-income exposure can be a good idea. DODLX is an actively managed fund that invests across global credit, currency and interest rate markets with a long-term perspective. The fund has consistently performed in the top quartile of its peer group since 2019, though it’s dropped to the second-highest quartile year to date.
“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,” writes Morningstar Director Mara Dobrescu. “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.
Manning & Napier High Yield Bond W (MHYWX)
If you don’t mind taking a bit more risk with your retirement portfolio, a high-yield bond fund like MHYWX could take your income to a whole new level. The fund’s almost 8% trailing 12-month yield is nearly double what most of the other funds on this list have returned. It even beats the majority of other high-yield bonds, and all for only 0.11% in expenses.
As a high-yield fund, MHYWX invests in noninvestment grade debt, also called junk bonds. However, it’s less risky than the average high-yield bond fund and has limited interest rate risk thanks to its shorter duration. So you’re getting superior returns for less risk and one of the lowest prices. It’s hard to ask for more.
Fidelity Series 0-5 Year Inflation-Protected Bond Index (FSTZX)
One of the key risks retirees face is having their savings not keep up with inflation. As the price of the goods and services you buy increase, your purchasing power decreases. If your investments aren’t earning at least as much as the inflation rate each year, you’re effectively losing money. This is where inflation-protected bond funds like FSTZX come into play.
Treasury inflation-protected securities, known as TIPS, adjust their principal in line with the consumer price index, which measures inflation. As inflation rises, the principal on TIPS rises, resulting in a higher interest payment for investors to help compensate for those higher prices. However, the principal will also go down if deflation occurs.
“Inflation alone will not dictate TIPS’ performance,” writes Morningstar Associate Analyst Mo’ath Almahasneh. “Inflation expectations are baked into the prices of traditional bonds, which means that TIPS will only outperform Treasury bonds with a similar maturity when inflation exceeds expectations.”
Almahasneh awards the fund a high process rating for its cost-effective market-weighting approach that promotes low turnover within the portfolio. This strategy is also what awards investors with a 0% expense ratio.
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5 Best Bond Funds for Retirement originally appeared on usnews.com
Update 11/18/24: This story was previously published at an earlier date and has been updated with new information.
