Fixed income instruments such as corporate bonds offer conservative investors opportunities to obtain current income at a reasonable amount of risk. Regardless of investment objective, some allocation to fixed income is recommended, as both a diversifier and income-generator. Government bonds, called treasuries, offer the safest investments and some also provide inflation protection.
The most cost-effective way to add bonds to your portfolio is through a bond index fund, which passively invests in several bonds and seeks to replicate the performance of a broad-based bond index. Here we look at 4 such funds, among the many that currently are offered in the marketplace (all data as of January 14, 2020).
- All investors should consider adding some fixed income elements to their portfolio as a diversifier.
- Fixed income funds offer investors a low-cost way to add these more conservative investments to their portfolio in a way that tracks bond indices.
- Here we profile just 4 indexed fixed income mutual funds among dozens of choices out there.
Fidelity Short-Term Bond Index (FNSOX)
Assets under management (AUM): $622 million
Net expense ratio: 0.03%
The Fidelity Spartan Short-Term Bond Index Fund tracks the performance of the Barclays U.S. 1-5 Year Treasury Bond Index, which is composed of U.S. Treasury obligations with maturity profiles of between one and five years. The fund uses sampling techniques to track the underlying index, and it typically maintains the maturity of its portfolio at three years or less. Due to a very low risk of default and the short-term nature of its holdings, the fund has a low 30-day SEC yield of 1.79%. The fund's average effective duration of 2.58 years makes it less sensitive to interest rate changes compared to other funds with longer maturities.
The fund boasts one of the lowest net expense ratios among its peers in the short government category. The fund has received a four-star overall rating from Morningstar for its risk-adjusted performance. The fund has no load fees and has no minimum investment amount.
Vanguard Intermediate-Term Bond Index (VBIIX)
AUM: $35.3 billion
Net expense ratio: 0.15%
Vanguard Intermediate-Term Bond Index Fund Investor Shares tracks the performance of the Barclays U.S. 5-10 Year Government/Credit Float Adjusted Index. The index is composed of U.S. Treasury, investment-grade domestic corporate, and investment-grade foreign bonds with maturity profiles of five to 10 years. The fund uses sampling techniques to minimize trading at the lowest possible tracking error. About 58% of the fund's portfolio is invested in U.S. government and agency bonds, while 40% of the fund's assets represent corporate bonds issued primarily by industrial and financial services companies.
The fund's average effective duration stands at 6.33 years, and its 30-day SEC yield is 2.06%. The fund has received a five-star overall rating from Morningstar. The fund does not charge its investors load fees, and it requires a minimum investment of $3,000.
Schwab Treasury Inflation Protected Securities Index Fund (SWRSX)
AUM: $1.0 billion
Net expense ratio: 0.05%
The Schwab Treasury Inflation Protected Securities Index Fund tracks the performance of the Barclays U.S. Treasury Inflation-Protected Securities (TIPS) Index (Series-L) SM. The benchmark index consists of all publicly-issued TIPS with at least one year until maturity, investment-grade ratings and $250 million or more of outstanding face value. All of the fund's holdings are denominated in U.S. dollars, and the fund is not exposed to currency risks from foreign holdings. About a third of the fund's assets are invested in U.S. nominal bonds, while the remainder are invested in U.S. TIPS.
Due to persistently low inflation, TIPS have generated below average returns throughout the 2010s. The Schwab Treasury Inflation Protected Securities Index Fund has an average effective duration of 7.74 years and a 30-day SEC yield of 1.69%. Morningstar gave the fund a four-star overall rating. The fund has no load fees and requires no minimum investment.
Vanguard Inflation-Protected Securities Index Fund (VIPSX)
AUM: $28 billion
Net expense ratio: 0.20%
The Vanguard Inflation-Protected Securities Index Fund Investor Shares tracks the performance of the Barclays U.S. Treasury Inflation-Protected Securities (TIPS) 5-10 Year Index. The benchmark index is composed of inflation-protected public obligations of the U.S. Treasury with remaining maturities of less than ten years. Because of its moderate duration, the fund is somewhat sensitive to real interest rate risk, but it also has lower returns relative to a longer-duration TIPS fund. About 96% of the fund's holdings are U.S. TIPS, while the remaining 4% sits in money markets.
The fund has an average effective duration of 7.38 years compared to its Schwab counterpart, making it much less sensitive to interest rate changes. The fund has a 30-day SEC yield of 0.07%. The fund received a five-star overall rating from Morningstar. The fund has no load fees and requires a minimum investment of $3,000.