Investors seeking capital preservation often focus portfolio allocations on minimal-risk investment options, including cash, money markets, certificates of deposit (CDs) 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, both of which are beneficial in a rising interest rate market.
For conservative investors, short-term bonds are attractive because they effectively reduce volatility. Mutual funds that invest in short-duration bonds provide this diversification, giving investors the ability to invest in high-quality, short-term bond holdings across various types of issuers, industries and regions.
Vanguard Short-Term Investment-Grade Fund (VFSTX)
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 with a focus 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-grade debt issues. The mutual fund currently invests heavily in corporate issues, comprising 57.01% of the investment mix, followed by securitized issues at 20.62% and
The fund currently manages $60.33 billion in investor assets across over 1,900 holdings and as of October 2018, has generated a 10-year annualized return of 3.13%. 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 yield is 3.27% and requires a minimum initial investment of $3,000.
DFA Short-Term Extended Quality Portfolio (DFEQX)
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 U.S. Treasury bonds, bills or notes, or debt obligations of federal agencies and instrumentalities.
Average debt maturities of the bonds underlying the fund are 2.74 years, with an average effective duration of 2.61 years. The mutual fund manages $5.7 billion in investor assets, and as of October 2018, it has generated a five-year annualized return of 1.41%. 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. No minimum initial investment is required.
Fidelity Short-Term Bond Fund (FSHBX)
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 preservation of capital in mind, fund managers invest at least 80% of the portfolio in investment-grade debt securities or a repurchase agreement of securities.The investment mix includes domestic and foreign issuers, with 50.47% invested in corporate issuers, 23.47% in U.S. Treasury bonds, and 16.48% in asset-backed securities (ABS).
The fund has accumulated $5.27 billion assets, and as of October 2018, it has generated a 10-year annualized return of 1.79%. The mutual fund has an expense ratio of 0.45%, in line with the majority of short-term bond mutual funds. The fund has a yield of 2.58%, and investors are not charged an upfront, deferred sales load or investment minimum.
Schwab Short-Term Bond Index Fund (SWSBX)
The Schwab Short-Term Bond Index Fund seeks to provide investors with high current income. This mutual fund tracks the performance of the 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 fixed, variable or floating interest rate categories with various maturities.
The fund is a rather new addition with an inception date of February 23, 2017, but the underlying securities and strategy employed make for a solid fixed-income instrument with which to expand a portfolio. Since inception, the fund has accumulated $529.8 million in assets. The mutual fund has an expense ratio of 0.29%, a yield of 2.94% and investors are not charged a sales load at the time of purchase nor redemption.
Nuveen Short Term Bond Fund
The Nuveen Short Term Bond Fund was established in December 1992, and seeks to provide investors with current income while maintaining principal stability. Fund managers invest at least 80% of the fund's assets in U.S. government securities, commercial and residential mortgage-backed securities (MBSs), asset-backed securities (ABSs), corporate debt obligations and municipal bonds.
Fund managers diversify holdings in terms of regional exposure, issuer type and bond rating. The majority of the fund's portfolio is invested in domestic holdings, making up around 90% of the investment mix. The Nuveen Short Term Bond Fund provides minimal exposure to government issues and municipal bonds.
Since inception, the fund has accumulated $442.8 million in assets across 224 positions and as of October 2018, it has generated a 10-year annualized return of 2.58%. The expense ratio is 0.47%. Investors are not assessed a deferred charge when they redeem shares. A minimum initial investment of $3,000 is required, and the fund yields a solid 2.61%.