Investors looking to preserve capital often allocate their portfolios to low-risk investment options such as cash, money markets, certificates of deposit, and bonds. Within the bond category, short-term bonds are considered safer due to their short duration and near-cash status, which results in less credit and interest rate risk.
For conservative investors, short-term bonds are appealing as they help reduce portfolio volatility. Short-duration bond mutual funds offer diversification by investing in high-quality bonds across various issuers, industries, and regions. Key takeaways for investors include: – A higher 10-year average annual total return often signifies better fund management. – Yields are a good indicator of future performance since short-term bond prices are relatively stable and hard to predict. – Higher yields typically imply higher credit or interest rate risk. – Fees and spreads are crucial considerations given the relatively low returns of short-term bonds. 1. The Vanguard Short-Term Investment-Grade Fund (VFSTX) – Average total return: 2.55% – 30-day yield: 0.97% – Expense ratio: 0.2% This fund provides diversification in terms of regional exposure, credit quality, and bond issuer type. Established in 1982, it aims to provide current income while maintaining minimal price volatility. Fund managers allocate a significant portion of the fund’s assets to high-quality fixed-income securities, with at least 80% in short and intermediate-term debt issues. As of June 30, 2020, the fund had 17.9% of its assets in commercial mortgage or asset-backed securities and 3.9% in Treasury or agency bonds. The fund manages $66.8 billion in investor assets across over 2,427 holdings. As of October 2020, it had a 10-year average annualized total return of 2.55% and an expense ratio of 0.2%, which is below the category average of 0.74%. Investors can purchase shares without an upfront sales load, and there are no redemption fees. The fund’s 30-day SEC yield was 0.97% on October 6, 2020, with a minimum initial investment of $3,000 required. Admiral shares are available for investments of $50,000 or more, with an expense ratio of only 0.1%. 2. The DFA Short-Term Extended Quality Portfolio (DFEQX) – Average total return: 2.96% – 30-day yield: 1.44% – Expense ratio: 0.33% The DFA Short-Term Extended Quality Portfolio, established in March 2009, seeks to maximize total return within the debt securities realm. Fund managers invest a minimum of 80% of the portfolio in investment-grade fixed-income securities. Up to 25% of the fund’s assets may be invested in U.S. Treasury, government agency, or federal instrumentality bonds, bills, and notes. The average maturity of the bonds underlying the fund was 1.Investing in short-term bond funds can be a strategic move for investors seeking stability and income. Here are the top five short-term bond funds for 2020:
1. **Mutual Fund with 44 Years of History**: Established on October 6, 1976, this fund has an average effective duration of 1.37 years. It shifted to shorter maturities in 2019, likely due to declining interest rates. With lower maturities, the 30-day SEC yield is .33%. Managing $6.2 billion in assets, it boasts a ten-year average annualized return of 2.06% as of October 2020. The fund has an expense ratio of 0.22%, lower than the category average, and allows for purchase without upfront or deferred sales charges.
2. **iShares Short-Term Corporate Bond ETF (IGSB)**: Launched in January 2007, this ETF has a substantial price and performance history. It aims to track an index of short-term U.S. investment-grade corporate bonds, excluding government bonds, leading to higher yields and slightly higher volatility. With $20.3 billion in assets and an average daily volume of 2.14 million shares traded as of October 2020, the fund offers small spreads, which is crucial for bond ETFs. The average total return over ten years ending in October 2020 was 3.04% per year, with a 30-day SEC yield of 0.92% on October 6. The expense ratio is a low 0.06%, and there are no sales loads or minimum investment requirements.
3. **Fidelity Short-Term Bond Fund (FSHBX)**: Incepted in March 1986, this fund seeks high current income for investors while preserving capital. It invests at least 80% of the portfolio in investment-grade debt securities or repurchase agreements, with a mix that includes domestic and foreign issuers. The fund has $3.2 billion in assets as of October 2020, generating an average annual total return of 1.75% over the last ten years. The 30-day yield on October 6, 2020, was 0.52%, and the expense ratio is 0.45%, in line with most short-term bond mutual funds. There are no upfront or deferred sales loads, and no minimum investment requirement.
4. **Schwab Short-Term Bond Index Fund (SWSBX)**: Seeking to provide high current income, this mutual fund tracks the performance of the Bloomberg U.S. Government/Credit: 1-5 Years Index. It invests in debt instruments found on the benchmark, focusing on investment-grade debt in fixed, variable, and floating interest rate categories with various maturities. The fund has an average total return of 3.16% since inception and a 30-day yield of .31%. The expense ratio is 0.06%.
The fund, with an inception date of February 23, 2017, is a relatively new addition to the market. Despite its recent establishment, the underlying securities and strategy make it a strong choice for the fixed-income component of any portfolio.
SWBX has accumulated $1.8 billion in assets as of October 2, 2020. Its expense ratio of 0.06% is notably low for an index fund, making it an attractive option. The 30-day yield is 0.31%, primarily due to 67% of the fund being invested in lower-yielding government and agency bonds. Investors benefit from no sales load at the time of purchase or redemption, and there is no minimum investment requirement, making it accessible for a wide range of investors.