5 Best Bond Funds for Retirement | Invest

Bonds form the foundation of most successful retirement portfolios. These assets are debt-related instruments issued by governments and companies seeking to raise capital. Think of them as the other side of the loan, where the “issuer” is the borrower and the investors collectively are the lenders.

Like other loans, bonds involve interest payments in addition to principal repayments. This means that this asset can provide investors with stable cashback. This makes it very attractive, especially to older investors who are looking for income to replace their paychecks after they quit their jobs. Bonds also tend to have much lower volatility than stocks, making them ideal for preserving money during retirement.

Unfortunately, the process of building a diversified portfolio of individual bonds can be complex and opaque. But thankfully, bond funds have democratized access to the bond market by allowing small investors to invest just a few dollars in big-ticket loans to companies, banks, and governments.

However, not all bond funds are the same. While bond funds are easy to buy, they can also be easily misunderstood by retirement investors. Here’s a quick summary of some of the top fixed income mutual funds and their features.

*As of January 24, 2024.
**As of December 31, 2023.

Dodge & Cox Income Fund (DODIX)

As investors look to retirement, they aim not only to preserve their capital, but also to watch their investments grow. This is where DODIX throws its hat into the ring. DODIX aims to achieve high and stable recurring profit margins while leveraging opportunities to maximize growth.

DODIX is an actively managed core fixed income fund comprised primarily of investment grade bonds. Opportunities exist for the fund in other areas, including debt securities from non-U.S. issuers and individual securities based on fundamental research.

Morningstar Manager Research Analyst Sam Crahan wrote that DODIX has a “skilled investment team and solid investment approach” and minimal fees, making it a tough fund to beat. ing.

Mr. Crahan noted that the fund tends to favor corporate bonds, which make up nearly one-third of its portfolio, and runs a compact, mostly cash fixed-income portfolio that primarily securitizes bonds. Given these characteristics, it’s not surprising that this fund’s 30-day SEC yield is his 4.6%.

Morningstar gives DODIX five stars and a gold badge, indicating that analysts believe the fund will outperform its affiliated index and most peer funds over market cycles.

Fidelity Inflation-Protected Bond Index Fund (FIPDX)

FIPDX is a fund created for those who want to hedge against inflation. It seeks to provide investment results commensurate with the total return of the inflation-protected sector of the U.S. Treasury market. This is accomplished by investing at least 80% of your assets in inflation-protected bonds included in the Bloomberg Treasury Inflation-Protected Securities (TIPS) index.

TIPS adjust the principal amount according to changes in the Consumer Price Index (CPI). When inflation, or CPI, increases, the principal value of the bond also increases. This could be a boon for retirement investors who must contend with a decline in purchasing power due to rising inflation.

The use of primarily Treasury-backed securities also means that the risk of default within the fund is low. That said, Moas Almahasneh, an associate analyst at Morningstar, said, “There is a high correlation between risk and reward in the fixed income market, and there is an opportunity cost to TIPS because the credit risk of TIPS is “Inflation-adjusted returns are likely to be lower than historical markets,” he said. Long run. “This is evidenced by the company’s negative 30-day SEC yield as of January 24th.

Although FIPDX features average returns, it also has the lowest expense ratio of any fund on this list at 0.05%. Unlike many of its competitors, this fund does not require a minimum investment amount.

Morningstar gives this fund four stars and a silver badge.

Vanguard Intermediate Term Bond Index Admiral Shares (VBILX)

VBILX is a great option for Goldilocks investors who don’t want to be locked into bonds with too long a term, but also don’t want to invest with too short a term. The fund invests in the sweet spot of U.S. debt securities with maturities between five and 10 years. Being a passive fund means it does this with an expense ratio as low as 0.07%.

Government bond funds typically invest more than 55% of their assets in U.S. government bonds, but a little more than one-fifth of their assets cover the full range of investment-grade corporate bonds at minimum investment levels. -Grade, BBB.

Morningstar gives the fund’s processes, management team, and parent company all above-average ratings. This could expose her to key man risk or the risk of relying on too few people, even though she is the only manager of the fund. However, a Morningstar analysis notes that coach Joshua Barrickman “has a history of managing strategy (and) has not changed hands in the past five years.”

VBILX currently has 2,154 bonds in its portfolio and over $37 billion in assets. This fund comes with his 4.4% 30-day SEC yield, making his VBILX even more attractive for retirees.

Morningstar gives it 4 stars and a gold badge.

Dodge & Cox Global Bond Fund (DODLX)

Diversification is just as important in a bond portfolio as it is in a stock portfolio. As a global bond fund, DODLX is a good option for gaining international bond exposure.

The fund, which has a portfolio covering 24 countries, “benefites from a patient and disciplined approach, strong and experienced leadership, and attractive fees,” Crahan wrote.

The company focuses on corporate debt, while peers tend to focus on sovereign debt, Crahan added. Focusing on corporate bonds tends to result in higher yields, as evidenced by his high SEC 30-day yield of 5%. This corporate bias can help the fund during interest rate shocks by making it less sensitive to interest rates than funds with more government debt, Crahan said.

“Dodge & Cox employs a team of industry, credit, and macro analysts to find the companies, sectors, and currencies that best fit the strategy’s global mission,” he wrote. “This process leads to a concentrated portfolio of high-conviction holdings, including a large allocation to emerging markets.”

More than 21% of its current holdings are from emerging market issuers, which Morningstar still views as moderate risk.

Morningstar gives DODLX 5 stars and a gold badge.

Fidelity Tax Exempt Bonds (FTABX)

For retirees looking to take control of their taxable income, Fidelity’s tax-exempt bonds can be a healthy option. The Fund generally invests at least 80% of its assets in investment grade municipal securities, which means that income associated with the Fund is exempt from federal tax.

“Fidelity Tax Free Bonds is managed by a talented and collaborative team that follows a consistent and unique approach. We have served our investors well over the long term,” said Morningstar Associate Director. , writes Elizabeth Foos.

This is reflected in the 30-day SEC yield of 3.5%. With his low expense ratio of 0.25%, investors can expect to pay no federal income taxes and keep more of the fund’s income in their own pockets. One thing to note about FTABX is that the minimum investment is $25,000. However, investors may find that the tax benefits outweigh the hefty costs of starting a business.

Morningstar gives this fund 4 stars and a gold badge.