Corporate bond mutual funds invest in bonds issued by private sector companies. Corporate bonds are fixed-income securities that make interest payments throughout the term of a bond, then pay principals upon their maturities. These bonds can be investment grade or non-investment grade, creating a range of returns due to the differences in default risk.
- Corporate bond mutual funds expose investors to corporate bonds issued by private companies, without the transaction fees involved in directly investing in the underlying bonds.
- Corporate bond funds have differing default risk profiles, based on whether the majority of bonds they invest in are investment grade or non-investment grade.
- Top corporate bond mutual funds include: Delaware Extended Duration Bond Fund Class C (DEECX), Fidelity Corporate Bond Fund (FCBFX), Calvert Long-Term Income Fund Class A (CLDAX), and Lord Abbett Income A (LAGVX).
Corporate bond mutual funds let investors conveniently access fixed income securities without investing the time and paying the transaction costs of buying individual bonds.
As of late 2018, investment-grade corporate bonds offered an average yield of 4.25%, according to Moody's Seasoned AAA Corporate Bond Yield figures. This represents a substantial increase from the 3.51% average yield in 2017.
The following five corporate bond mutual funds are worth exploring.
Delaware Extended Duration Bond Fund Class C (DEECX)
Created on September 15, 1998, Delaware Extended Duration Bond Fund Class C (DEECX) is managed by Delaware Investments, a division of the Macquarie Group. DEECX invests at least 80% of its net assets in investment grade long-duration corporate bonds. Government and municipal bonds respectively claim 17% and 2% of the fund’s allocation.
The fund’s bond holdings are rated BBB- and above by Standard & Poor's, or Baa3 and above by Moody's credit agency. DEECX holds 182 securities that include corporate bond issued by JPMorgan Chase, Pepsico, and Duke Energy.
Because of the fund’s longer-than-average duration of 13.4 years, it is sensitive to changes in market interest rates.
On November 8, 2019, DEECX held a four-star rating by Morningstar, with a 1.57% expense ratio, and a 21.67% YTD return.
This fund is favored by those seeking exposure to highly-rated corporate bonds, who are comfortable tolerating interest rate risk and volatility.
Fidelity Corporate Bond Fund (FCBFX)
The Fidelity Corporate Bond Fund invests more than 80% of its assets in investment grade foreign and domestic corporate bonds with interest rate risks similar to the Barclays U.S. Credit Bond Index. The remaining assets are spread out between government bonds and cash. FCBFX's top holdings include issuances by Bank of America, Barclays, and Morgan Stanley.
Unlike DEECX, this fund holds corporate bonds with shorter maturities, averaging 6.9-year durations. For this reason, the fund's returns are less sensitive to changes in interest rates and are less volatile, which comes at the expense of slightly-lower returns.
On November 8, 2019, FCBFX had a three-star rating from Morningstar, a 0.45% expense ratio, and a 14.16% YTD return.
This fund is most suitable for investors who want exposure to investment-grade corporate bonds with shorter durations and less interest rate risk sensitivity.
Calvert Long-Term Income Fund Class A (CLDAX)
Calvert Long-Term Income Fund Class A seeks to maximize returns by investing in U.S. dollar-denominated corporate, government, and municipal bonds with investment grade credit quality.
Compared to other funds, CLDAX has a somewhat lower concentration of corporate bonds, with an approximate 54% allocation. The rest of its assets are spread among U.S. government bonds (31%), securitized obligations (10%), and some cash and municipal bonds holdings. Nearly 16% of the fund's assets invest in a single U.S. government bond, that’s due to mature in 2045.
On November 8, 2019, CLDAX had a two-star rating from Morningstar, a 0.92% expense ratio, and a 20.70% YTD return.
The fund is most appropriate for investors who seek to hold U.S. government bonds to mitigate their default risk.
Federated Bond Fund Class F Shares (ISHIX)
Federated Bond Fund Class F Shares invests in investment grade and non-investment grade corporate bonds. Corporate bonds account for more than 90% of the fund’s assets, while government obligations account for less than 5% of the fund's holdings.
ISHIX allocates 27% of its portfolio to high-yield bonds and 71% to investment-grade bonds. Due to the fund’s exposure to speculative-grade bonds, its returns are subject to greater default risk, yet under favorable market conditions, the fund can outperform its peers.
On November 8, 2019, ISHIX had a two-star rating from Morningstar, a 0.86% expense ratio, and a 12.84% YTD return.
ISHIX suits investors seeking exposure to investment-grade and speculative bonds that are likely to generate high returns under favorable bond market conditions.
Lord Abbett Income A (LAGVX)
The Lord Abbett Income A mutual fund invests in both investment-grade and high-yield corporate bonds, but with a greater emphasis on bonds on a lower range of the investment-grade spectrum.
The fund allocates approximately 65% of its holdings to corporate bonds and about 24% to securitized fixed income instruments.
On November 8, 2019, LAGVX had a four-star rating from Morningstar, a 0.77% expense ratio, and an 11.85% YTD return.
LAGVX is most appropriate for investors looking to diversify their portfolios with high-yield bonds that focus on investment-grade issues, with BBB credit quality ratings.
When unsure about the default risk, investors should remember that generally speaking, the longer a bond’s maturity is, the greater its degree of price volatility will be.