If interest rates have peaked bond funds will rise
- PGIM Total Return Bond A (PDBAX): This Bond fund offers both yield and stability
- Vanguard Long Term Investment Graded Fund (VWESX): This fund is of no exception to the other. During the current downturn, bond prices have been following stock prices down.
- iShares Floating Rate Bond ETF (FLOT): It offers more safety than other bond funds. If inflation has peaked, bonds will look like a great deal.
That’s a mistake. When interest rates are rising, it’s safer to lend your money than to put it in a company’s stock. Bonds offer safe yields. When interest rates are falling, bonds offer capital gains.
You may feel put off by “falling” bond prices. When interest rates rise, the price of bonds from even the best creditors fall. If you see hyper-inflation ahead, buying bonds looks silly. Over the last year, as interest rates have risen, the total return on most bond funds has been negative.
But a balanced portfolio always includes debt as well as equity. When companies fail, debtors get their money first. Even the most speculative bonds, from the riskiest corporate debtors, pay off 90% of the time. The average corporate bond pays off 95% of the time. For municipal debt, your odds of being stiffed are less than 1 in 1,000. That’s why municipal bond defaults are big news.
You can get in on the safety of bonds quickly by buying a bond Exchange Traded Fund (ETF). These funds are traded just like common stocks. They adjust their holdings automatically, tracking an index, just like stock funds.
There are hundreds of such ETFs, but here are three I rate highly for yield and safety. You can buy all three for your investment or retirement account today, as easily as you can shares of Walt Disney (NYSE:DIS). That means you can get out of these funds easily, just as you can stock. These are three U.S Bond Funds to Buy:
|PDBAX||PGIM Total Return Bond A||$12.39|
|VWESX||Vanguard Long Term Investment Graded Fund||$8.31|
|FLOT||iShares Floating Rate Bond ETF||$50.12|
PGIM Total Return Bond Fund (PDBAX)
Pimco is the biggest asset manager you never heard of, with over $2 trillion under management, mostly in bond funds.
The PGIM Total Return Bond A (PDBAX) has $42.3 billion in assets, and an expense ratio of 76%. Most of its assets are in corporate bonds, along with asset-based loans and some emerging markets debt. It seeks to track the Bloomberg U.S. Aggregate Bond benchmark.
The fund’s loans usually extend out about seven years, but this year the managers have leaned into short-term bonds this year, to take advantage of rising interest rates. It has been down sharply in 2022, by 13.5%, but it is usually among the best performers in its peer group. On June 28 it was trading for $12.39/share. Morningstar gives it a rating of three stars.
Assets are widely diversified, with just 9% in the top nine holdings, the largest being in Federal National Mortgage Association (FNMA), known as Fannie Mae, mortgage bonds.
Vanguard Long Term Investment Grade Fund (VWESX)
I like Vanguard funds for their low expense ratios, and the Vanguard Long Term Investment Graded Fund (VWESX) is no exception. VWESX takes just 0.22% of assets for management each year, about half the average for similar funds, but requires a minimum investment of $3,000.
On June 15, the fund had $17.09 billion invested in 1,386 different holdings. Some of its larger positions were in U.S. and California government bonds, Wells Fargo (NYSE:WFC) and Anheuser-Busch InBev (NYSE:BUD) corporate bonds, and international bunds managed through General Electric (NYSE:GE).
The fund focuses on long term bonds and uses the Bloomberg US Long Credit A/Better Ix benchmark. It has done even worse than the PIMCO fund this year, down 22.5%, but carries a yield of 3.76% so those who haven’t sold aren’t out any money. Still, it has outperformed its peer group, and Morningstar gives it a rating of 4 stars. On June 28 shares were trading at $8.31 each.
iShares Floating Rate Bond ETF (FLOT)
The iShares Floating Rate Bond ETF (FLOT) is managed by Blackrock (NYSE:BLK) and is focused on safety, with short term loans whose interest rate adjusts for inflation.
The fund has nearly broken even in 2022, down just 0.6%, and has a very low expense ratio of 0.15%. It has $9.6 billion of assets under management and seeks to match the Bloomberg US Floating Rate Note Index for bonds with a duration under five years.
FLOT has dramatically overperformed its peer group, especially in 2022, mainly by buying corporate funds managed by other big institutions like Goldman Sachs (NYSE:GS), Morgan Stanley (NYSE:MS) and JPMorgan Chase (NYSE:JPM).
FLOT offers more safety than other bond funds, but usually offers less return. As interest rates fall, loans in FLOT’s portfolio won’t rise in value, as their interest rates will adjust downward. On June 28 shares in FLOT were trading at $50.13 each.
This post originally appeared at InvestorPlace.
On the date of publication, Dana Blankenhorn held no positions in stocks or ETFs mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.