Investors seeking capital preservation often focus portfolio allocations on minimal-risk investment options, including cash, money markets, certificates of deposit, and bonds.

Under the bond category, short-term bonds fall on the safer end of the debt securities risk spectrum due to their short duration and subsequent near-cash status. A shorter duration or maturity date leads to less credit risk and less interest rate risk.

For conservative investors, short-term bonds are attractive because they effectively reduce volatility. Mutual funds in the short-duration bond category provide this diversification by investing in high-quality bond holdings across various types of issuers, industries, and regions.

1. The Vanguard Short-Term Investment-Grade Fund (VFSTX)

  • Average total return: 2.89%
  • 30-Day Yield: 2.28%
  • Expense ratio: 0.2%

The fund offers diversification in terms of regional exposure, credit quality, and bond issuer type. Established in 1982, the Vanguard Short-Term Investment-Grade Fund seeks to provide investors with current income and focuses on maintaining minimal price volatility.

Fund managers invest a substantial amount of the fund's assets in high-quality fixed-income securities, with no less than 80% in short and intermediate-term debt issues. The mutual fund invested 24.2% of its assets in commercial mortgage or asset-backed securities and 7.7% in Treasury or agency bonds on July 31, 2019.

The fund currently manages $60.5 billion in investor assets across over 1,900 holdings. As of July 2019, it has generated a 10-year average annualized total return of 2.89%. The fund has an expense ratio of 0.2%, well below the category average of 0.74%.

Investors can buy shares without an upfront sales load, and no charge is assessed when shares are redeemed. The fund's 30-day Securities and Exchange Commission (SEC) yield was 2.28% on August 19, 2019. It requires a minimum initial investment of $3,000. Admiral shares are available with an investment of $50,000 or more, and their expense ratio is only 0.1%.

2. The DFA Short-Term Extended Quality Portfolio (DFEQX)

  • Average Total Return: 2.63%
  • 30-Day Yield: 1.44%
  • Expense Ratio: 0.22%

The DFA Short-Term Extended Quality Portfolio was established in March 2009 and seeks to provide investors with the maximum total return within the realm of debt securities. Fund managers invest a minimum of 80% of the portfolio in fixed-income securities believed to be investment-grade quality. Up to 25% of the fund's assets may be invested in bonds, bills, and notes issued by the U.S. Treasury, government agencies, or federal instrumentalities.

The average maturity of the bonds underlying the fund was 1.86 years on July 31, 2019. The average effective duration was 1.80 years. The fund shifted to shorter maturities in 2019, likely in response to declining interest rates. Lower maturities usually lead to lower yields, and the 30-day SEC yield is down to 1.44%.

The mutual fund managed $6.3 billion in investor assets. It generated a ten-year average annualized return of 2.63% as of July 2019. The mutual fund has an expense ratio of 0.22%, which falls below the category average, and investors can purchase shares with no upfront or deferred sales charge.

3. The iShares Short-Term Corporate Bond ETF (IGSB)

  • Average Total Return: 2.30%
  • 30-Day Yield: 2.40%
  • Expense Ratio: 0.06%

The iShares Short-Term Corporate Bond ETF began in January of 2007, which gives it a substantial price and performance history for an ETF. The fund's objective is to track an index of short-term U.S. investment-grade corporate bonds. The fund does not include government bonds, so it has a higher yield and slightly higher volatility.

The fund had $12.8 billion in assets and an average daily volume of 1.45 million shares traded as of August 20, 2019. The size of the market for the fund ensures small spreads, which is a significant factor for bond ETFs.

Over the ten years ending with July of 2019, the average total return was 2.30% per year. The 30-day SEC yield was a substantial 2.40% on August 20, in part thanks to low fees of just 0.06%. This fund has no sales loads or minimum investment requirements.

4. The Fidelity Short-Term Bond Fund (FSHBX)

  • Average Total Return: 1.98%
  • 30-Day Yield: 1.98%
  • Expense Ratio: 0.45%

The Fidelity Short-Term Bond Fund has an inception date of March 1986, and the fund seeks to obtain a high level of current income for investors. With the preservation of capital in mind, fund managers invest at least 80% of the portfolio in investment-grade debt securities or repurchase agreements.

The investment mix includes domestic and foreign issuers, with 49.84% invested in corporate issuers, 24.01% in U.S. Treasury bonds, and 15.64% in asset-backed securities (ABS). The fund has accumulated $5.71 billion in assets as of June 30, 2019.

The mutual fund generated an average annual total return of 1.98% over the last ten years. Coincidentally, the fund also had a 30-day yield of 1.98% on July 31, 2019. The mutual fund has an expense ratio of 0.45%, in line with the majority of short-term bond mutual funds. The fund does not charge an upfront or deferred sales load, and there is no minimum investment requirement.

5. The Schwab Short-Term Bond Index Fund (SWSBX)

  • Average Total Return: N/A
  • 30-Day Yield: 1.84%
  • Expense Ratio: 0.06%

The Schwab Short-Term Bond Index Fund seeks to provide investors with high current income. This mutual fund tracks the performance of the Bloomberg Barclays U.S. Government/Credit: 1-5 Years Index by investing a substantial amount of the portfolio assets in debt instruments found on the benchmark. Fund managers focus on investment-grade debt instruments in the fixed, variable, and floating interest rate categories with various maturities.

The fund is a rather new addition with an inception date of February 23, 2017. However, the underlying securities and strategy employed on this fund make it a solid choice for the fixed-income component of any portfolio.

Key Takeaways

  • A higher 10-year average annual total return often indicates better management.
  • Yields provide a good guide to future performance because short-term bond prices are fairly stable and difficult to predict.
  • Higher yields usually mean higher credit risk or higher interest rate risk.
  • Fees and spreads are important because short-term bonds have relatively low returns.

SWSBX has accumulated $858 million in assets as of July 31, 2019. The expense ratio of 0.06% is impressively low, as one would expect from an index fund. The 30-day yield was just 1.84%, mostly because 66% of the fund is invested in lower-yielding government and agency bonds. Investors are not charged a sales load at the time of purchase or redemption, and there is no minimum investment requirement.