What Are the Best Bond Funds?

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Before buying or selling bond funds, it’s important to know something about the current status of the market for these securities. An assessment of bond funds in today’s market can help you answer the question, “What are the best bond funds?”

Diversification is one of the best ways to minimize investment risks associated with any asset class. If you’d like to invest in bonds but don’t want to build and manage a portfolio of individual issues, bond funds can help you gain exposure in corporate taxable bonds, municipal tax-free bonds, high yield bonds or the highest yielding junk debt securities. Choose from mutual funds, closed-end unit trusts (UITs), and exchange traded funds (ETFs).

Bond funds are perhaps the best known way to invest in an existing portfolio of bond securities. A bond mutual fund pays dividends based on portfolio interest earned. The bond fund’s value rises and falls as the securities in the portfolio change in value according to investor demand, interest rates, and other factors.

Top Bond Funds

Top bond funds may include many different issues, maturities, and coupon rates. It’s also wise to diversify your funds across bond fund types, such as tax-free municipal bond funds, international bond funds, U.S. government bond funds, corporate bond funds, and high yield corporate bond funds.

The top bond funds in terms of assets under management (AUM) offer different bond fund types. Let’s take a look at the top five taxable bond funds according to The Wall Street Journal:

  • Vanguard Total Bond Market Index Fund Admiral (VBTLX) tracks U.S. investment grade bonds (Barclays U.S. Aggregate Bond Index). This is a passive fund. VBTLX has more than USD 151 billion AUM. Over a five year holding period, an original USD 10,000 investment would have grown to USD 11,953. Over 10 years, the investment would have grown to USD 15,764.
  • PIMCO Total Return Fund Institutional (PTTRX) is a core bond investment fund for institutional investors. The initial purchase is USD 1,000, 000. PTTRX once had USD 300 billion AUM (2013) and now has about USD 89 billion AUM. This is an actively managed fund. An initial investment in PTTRX would have grown to USD 11,865 in five years and USD 17,477 in 10 years.
  • Vanguard Total Bond Market II Index Fund Investor (VTBIX) is a passive core bond index fund that tracks the Barclays U.S. Aggregate Float-Adjusted Index. The fund has more than USD 89 billion AUM. Over five years, an initial USD 10,000 investment would have grown to USD 11,898.
  • Metropolitan West Total Return Bond Fund I (MWTIX) is an actively managed intermediate-term bond fund with more than USD 71 billion AUM. The fund invests in mid to moderate credit quality taxable bond issues such as Agency MBS pass-through securities, asset-backed securities, corporate bonds, and U.S. Treasuries. An initial USD 10,000 investment in MWTIX would have grown to USD 12,519 in five years and to USD 18.336 in 10 years.
  • Templeton Global Bond Fund Advisor (TGBAX)is an actively managed world bond fund that typically invests in short-duration, lower credit quality bonds from international issuers, such as Mexico USD Mex St 7.75 percent, Federative RepublikBrasilien Bras 10 percent, United Mexican States 7.62435 percent, and Hungary Republic 6.375 percent bonds. The fund may keep a large percentage of AUM in cash at any time. TGBAX has more than USD 53 billion AUM. The goal of the fund is to achieve a higher current yield in fixed income securities by investing assets in international bonds. An initial USD 10,000 investment in TGBAX would have returned USD 10,685 in five years and USD 18,944 in ten years.

Top 10 Bond Funds

The Wall Street Journal’s top 10 bound funds include:

  • Two additional Vanguard funds (Vanguard Short-Term Investment Grand Fund Admiral VFSUX with almost USD 53 billion AUM; and Vanguard Total International Bond Index Fund Investor VTIBX with more than USD 52 billion AUM).
  • A second PIMCO bond fund (PIMCO Income Fund Institutional PIMIX with more than USD 53 billion AUM).
  • DoubleLine Total Return bond fund I DBLTX with more than 55 billion AUM.
  • Dodge & Cox Income bond fund DODIX with more than USD 43 billion AUM.

Tax-Free Income Bond Funds

Not all investors need tax-free income but, if you’re searching for a way to maximize your net return on investment after taxes, a tax-free income bond fund might be right for you. Some of the top funds in this category include:

  • Vanguard Intermediate-Term Tax-Exempt Fund VWITX has more than USD 47 billion AUM. The minimum investment in the fund is just USD 3,000. VWITX has performed a bit better than the Barclays Municipal TR USD it traces. An initial USD 10,000 investment would have grown to USD 12,761 in five years and USD 15,423 in 10 years.VWITX income is free from federal taxes only. Examples of holdings include Central Plans Energy Proj (Nebraska) Rev Ref 5 percent, University of California Revs for Prev Rev Bonds 5 percent, California State GO (General Obligation) Bonds 5 percent, California State GO Bonds 5.75 percent, and Maryland State GO Bonds 5 percent. The fund invests in state/local government obligations, education, transportation, health, and advanced refunded issues.

According to U.S. News & World Report, other top 10 tax exempt funds in the municipal intermediate-term category include:

  • Wells Fargo CoreBuilder Shares Series M (WTCMX) with more than USD 386 million AUM. WTCMX generates a federally tax-free income stream. Current holdings include municipal bonds of state/local governments (GO), transportation, industrial, and water & sewer issues. This fund may deploy assets in inverse floaters in search of higher returns.
  • Vanguard High Yield Tax Exempt Fund (VWAHX) with almost 10 billion AUM generates federally tax-fee income by investing in middle-moderate credit quality municipal issues of state/local governments (GO), transportation, health, education, and industrial revenue bonds. This fund takes on addition risk in search of better than average returns.
  • State Farm Municipal Bond Fund (SFBDX) has more than USD 697 million AUM. The fund invests in state/local governments (GO), education, water & sewer, advanced refunded, and transportation issues among others. At least 70 percent of the portfolio is invested in A-rated or better municipal securities (S&P, Moody’s). Up to 30 percent of the portfolio can be invested in med to lower-credit quality muni bonds.
  • USAA Tax Exempt Intermediate Term Fund (USATX) has more than USD 4 billion AUM. The fund invests in state/local governments (GO), health, transportation, industrial, and education municipal bond sectors. The fund invests in municipal credit quality of BBB or better.

Top 10 Tax-Free Bond Funds

According to U.S. News & World Report, the remaining five intermediate tax-free funds in the top ten include: T. Rowe Price Summit Municipal Intermediate Fund PRSMX; Dreyfus Municipal Bond Fund DRTAX and Dreyfus AMT-Free Municipal Bond Fund DMUAX; BMO Intermediate Tax-Free Fund MITFX; BNY Mellon National Intermediate Municipal Bond Fund MPNIX; and Federated Intermediate Municipal Trust (FIMTX).

If you’re in search of tax-free income and you live in a state with an income tax, compare state tax-free bond funds with federally tax-free bond funds to identify the best returns. If you’re subject to AMT tax, compare funds that offer relief.

Ultimately, the best bond funds help you achieve financial goals and earn a consistent return on your money. Not all bond funds are created equal. The bond funds explored in this article are different but all share a common feature: the costs to own them are low. In a low interest rate environment, it’s especially important to minimize the cost of owning bond funds. The money you save is just as important as the money you make.