What is a 'Debt Fund'

A debt fund is an investment pool, such as a mutual fund or exchange-traded fund, in which core holdings are fixed income investments. A debt fund may invest in short-term or long-term bonds, securitized products, money market instruments or floating rate debt. The fee ratios on debt funds are usually lower, on average, than equity funds because the overall management costs are lower.


A debt fund can also be known as a credit fund or a fixed income fund.

Debt funds fall under the fixed income asset category and are typically used as tactical investments for low risk portions of a portfolio that may be seeking preservation of capital or for investors seeking low risk income distributions.

Debt Fund Risk

Within the fixed income category debt funds can invest in a wide range of securities that have varying risk levels. A form of U.S. government debt is usually considered to have the least risk. Corporate businesses also issue debt as part of their capital structure. Corporate debt is generally often classified by a company’s credit rating. Investment grade debt will be issued from companies with generally stable outlooks and higher credit quality. High yield debt is usually issued from lower credit quality companies with potential emerging growth prospects. High yield debt can generate higher returns with higher risk. Other debt categories can include developed market debt and emerging market debt.

Debt Fund Investing

There are a wide range of debt fund options for investors seeking low risk income investments within the fixed income universe. Similar to other asset categories, investors can generally turn to passive and active investment products.


Some of the largest and most actively traded passive fixed income investment funds seek to replicate the top fixed income benchmark indexes. These indexes include the Bloomberg Barclays U.S. Aggregate Bond Index and the ICE U.S. Treasury Core Bond Index. Passive ETFs replicating these indexes include:

iShares Core U.S. Aggregate Bond ETF

The iShares Core U.S. Aggregate Bond ETF (AGG) is a passively managed index replication fund that tracks the Bloomberg Barclays U.S. Aggregate Bond Index. The Fund has a net expense ratio of 0.05%. Its year-to-date return through October 31, 2017 is 3.21% versus the Index’s return of 3.20%.

iShares U.S. Treasury Bond ETF

The iShares U.S. Treasury Bond ETF (GOVT) is a passively managed index replication fund that tracks the ICE U.S. Treasury Core Bond Index. The Fund has a net expense ratio of 0.15%. Its year-to-date return through October 31, 2017 is 2.18% versus the Index’s return of 2.26%.


A wide range of active managers also exist in the debt fund market. Active debt fund managers will seek to outperform debt fund indexes such as the Bloomberg Barclays U.S. Aggregate Bond Index and the ICE U.S. Treasury Core Bond Index.

The First Trust Tactical High Yield ETF (HYLS) is an example of an actively managed debt fund. HYLS invests for income and capital appreciation. The Fund has total annual expenses of 1.11%. Year-to-date the NAV return on HYLS as of October 31, 2017 is 5.95%. It measures performance versus the ICE BofAML US High Yield Constrained Index which has comparable year-to-date return of 7.46%. While the Fund is not outperforming its selected index year-to-date it is one of the top performing funds in the U.S. high yield bond universe.

Overall, investors in debt funds should understand the return calculation measurements used as performance indicators. Since debt funds involve income generation, funds may pay scheduled monthly or quarterly dividends. Total return calculations account for income payouts while general return calculations may not.

Global Debt Funds

Countries issue debt in various forms to support their governmental fiscal policies. In the U.S., government issued debt is generally considered to be the lowest risk fixed income investment in the market.

U.S. Debt Funds

The U.S. government issues a wide range of securities for investment. These securities can be invested in directly or investors can choose to invest in diversified debt funds including these securities. BlackRock’s iShares is one of the market’s leading managers for indexed U.S. government debt fund ETFs.

U.S. corporate debt funds are typically segregated by credit quality of the corporate issuer. U.S. companies have some of the highest credit ratings globally, making U.S. debt funds in high demand.

Global Debt Funds

Globally countries around the world also issue debt to support their government fiscal policies. Risks and returns of government debt funds vary significantly by the country’s fiscal policies and economic environment. Similar to equities, investors can look to developed and emerging market government debt funds as general categories for investment. Similarly, global corporate bond funds can be segregated by developed and emerging market indexes. Credit ratings are assigned globally to both government bonds and corporate bonds with standard credit rating analysis applicable globally.

To read more about global government and corporate debt funds see also: Top 5 Global Bond Funds.

  1. Total Bond Fund

    A total bond fund is a mutual fund or exchange-traded fund that ...
  2. Funding Operations

    Funding operations involve consolidating short-term unfunded ...
  3. Debt Issue

    A debt issue is a financial obligation that allows the issuer ...
  4. Bond Fund

    A bond fund is a fund invested primarily in bonds and other debt ...
  5. Net Debt

    Net debt is a metric that shows a company's overall debt situation ...
  6. Debt Security

    A debt security is an instrument bought or sold between two parties ...
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