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Regardless of your investment objective, bonds often play a significant role. Some funds, like the Vanguard Total Bond Market ETF, are designed to give access to a wide variety of income-generating vehicles while minimizing costs. Many bond funds are suitable as core holdings for investors. Here, we take a look at five of the top bond funds for long-term investors.
Key Takeaways
- Fidelity Total Bond Fund (FTBFX) aims to provide high current income with 75% invested in debt securities and 15% in riskier, low-rated bonds. It also uses derivatives for additional returns, making it a valuable option for income-focused investors.
- Vanguard Total Bond Market ETF (BND) offers broad exposure to U.S. investment-grade bonds with a low expense ratio of 0.035%, making it a cost-effective choice for investors seeking to minimize fees while accessing a diverse bond portfolio.
- Dodge & Cox Income Fund (DODIX) focuses on stable income and capital preservation by holding 80% of assets in investment-grade securities, providing a safe core option for long-term investors.
- Metropolitan West Total Return Bond Fund (MWTRX) targets outperformance of the Bloomberg U.S. Aggregate Bond Index with a $5,000 minimum investment, appealing to those ready to commit more capital for potential higher returns.
- Loomis Sayles Core Plus Bond Fund (NEFRX) strives for higher returns by investing in high-risk, high-yield securities and emerging markets, suitable for investors seeking aggressive growth at the expense of higher risk and cost (expense ratio of 0.73%).
Fidelity Total Bond Fund (FTBFX): High Current Income Using Derivatives
The Fidelity Total Bond Fund seeks to provide investors with high levels of current income. The fund uses the Bloomberg U.S. Universal Bond Index in guiding its allocation decisions and as a benchmark index. The fund invests around 75% of its assets in a wide range of debt securities. It then invests about 15% of its assets in debt securities with lower credit ratings. These lower-quality debt securities have higher risks than investment-grade bonds, but they also offer higher yields. The fund also engages in derivatives trading, which allows increased leverage but also contains specific types of risk. The derivatives include trading swaps, options, and futures contracts.
The Fidelity Total Bond Fund had $16.2 billion in assets under management (AUM) with a 30-day Securities and Exchange Commission (SEC) yield of 2.02% as of October 2020. The debt securities in the fund had an average duration of 5.23 years. Historically, the fund displayed low volatility. It had over 76% of its assets in investment-grade bonds, with over 26% allocated to U.S. government bonds. It had a reasonable expense ratio of 0.45%, and there was no minimum investment requirement.
Vanguard Total Bond Market ETF (BND): Comprehensive Exposure to U.S. Bonds
The Vanguard Total Bond Market ETF provides broad exposure to U.S. investment-grade bonds. As of October 2020, the fund invested around 59% of its assets in U.S. government bonds across all maturities. The remaining 41% was held in other investment-grade bonds. It had a very low expense ratio of 0.035%, which is over 90% below the average expense ratio of funds with similar holdings. Vanguard funds are known for having some of the lowest expense ratios in the industry.
The Vanguard Total Bond Market Fund had $288.5 billion in total net assets ($60.7 billion in the ETF) with an SEC yield of 1.21%. It had 9,881 holdings with an average effective maturity of 8.5 years and an average duration of 6.5 years. Since it is an ETF, there is no minimum initial investment requirement.
Dodge & Cox Income Fund (DODIX): Stability and Long-Term Capital Preservation
The Dodge & Cox Income Fund seeks to provide a high and stable rate of current income while providing for long-term preservation of capital. Around 80% of assets are in investment-grade securities, with up to 20% placed in debt obligations below investment grade. DODIX is a rather safe core holding, even if it doesn’t carry the same brand recognition of Vanguard or BlackRock.
The Dodge & Cox Income Fund had an SEC yield of 1.99% with an expense ratio of 0.42%. It had net assets of $64.2 billion in its portfolio as of October 2020. The fund requires a $2,500 initial investment.
Metropolitan West Total Return Bond Fund (MWTRX): Striving for Superior Performance
The Metropolitan West Total Return Bond Fund is designed to be a core bond fund. Its goal is to outperform the Bloomberg U.S. Aggregate Bond Index while maintaining a similar risk profile to that index. The Bloomberg U.S. Aggregate Bond Index tracks investment-grade bonds.
The Metropolitan West Total Return Bond Fund invests in a wide range of fixed-income securities, including derivatives that may be used to hedge risk exposure. The fund had over $89 billion in AUM with an TTM yield of 1.74% as of October 2020. It had an expense ratio of 0.67% for the investor shares. The holdings in the portfolio had an average duration of 5.75 years and an average maturity of 7.69 years. The fund required a rather hefty $5,000 initial investment.
Loomis Sayles Core Plus Bond Fund (NEFRX): Higher Returns with Diverse Bonds
The Loomis Sayles Core Plus Bond Fund seeks to provide higher total returns by investing in quality corporate and U.S. government bonds. The fund has a higher amount of risk than many other bond funds because it holds fixed-income securities that are high-yield and from emerging markets. It had net assets of $9.25 billion, with an SEC yield of 1.04% as of October 2020.
The Loomis Sayles Core Plus Bond Fund had a somewhat high expense ratio of 0.73%. It must perform better to justify its higher expenses compared to other funds. The holdings in the fund have an effective duration of 6.59 years, with an average maturity of 9.01 years. The fund required a minimum investment of $2,500.
