Recent years have seen significant volatility in bond prices due to the Federal Reserve’s efforts to combat high inflation by raising interest rates. However, with the possibility of an end to rate hikes on the horizon, investors may have the opportunity to capitalize on attractive yields in short-term bonds.
For those looking to add short-term bond funds to their portfolio, here is everything you need to know.
Understanding Short-Term Bond Funds
Short-term bond funds, including mutual funds and exchange-traded funds (ETFs), typically invest in government and corporate bonds with maturities of less than five years. These bonds are less sensitive to interest rate changes compared to longer-term bonds, making them a lower-risk option for investors. As interest rates rise, bond prices fall, and vice versa.
Investors in short-term bond funds receive a yield, which represents the income generated by the bonds in the portfolio relative to the current market price.
Who Should Invest in Short-Term Bonds?
Short-term bond funds are suitable for a wide range of investors, especially those saving for short-term goals. Investing money that you anticipate needing in the next three to five years in short-term bonds can provide a decent rate of return without excessive risk.
Before investing, pay attention to the fund’s expense ratio, as lower expenses generally benefit investors.
Top Picks for Short-Term Bond Funds
*Data accurate as of June 27, 2024.
1. SPDR Portfolio Short-Term Corporate Bond ETF (SPSB)
The SPSB ETF aims to mirror the performance of the Bloomberg U.S. 1-3 Year Corporate Bond Index, offering exposure to U.S. corporate bonds with maturities of one to three years.
- SEC yield: 5.32 percent
- Expense ratio: 0.04 percent
- AUM: $7.6 billion
2. iShares 1-5 Year Investment Grade Corporate Bond ETF (IGSB)
This iShares fund tracks an investment-grade corporate bond index with maturities of one to five years, including bonds from Bank of America, JPMorgan Chase, and Microsoft.
- SEC yield: 5.29 percent
- Expense ratio: 0.04 percent
- AUM: $20.3 billion
3. Schwab 1-5 Year Corporate Bond ETF (SCHJ)
The SCHJ ETF seeks to follow an index measuring the performance of the short-term U.S. corporate bond market, holding bonds with maturities of one to five years.
- SEC yield: 5.25 percent
- Expense ratio: 0.03 percent
- AUM: $403.4 million
4. Vanguard Short-Term Bond ETF (BSV)
The BSV ETF aims to replicate a market-weighted bond index consisting of investment-grade bonds with an average maturity of 1-5 years, including government bonds, high-quality corporate bonds, and international dollar-denominated bonds.
- SEC yield: 4.83 percent
- Expense ratio: 0.04 percent
- AUM: $32.3 billion
5. Fidelity Short-Term Bond Fund (FSHBX)
The FSHBX Fund aims to generate current income while preserving capital by investing at least 80 percent of its assets in investment-grade debt with an average maturity of three years or less.
- SEC yield: 4.96 percent
- Expense ratio: 0.30 percent
- AUM: $2.3 billion
Conclusion
Short-term bond funds offer a secure investment option for funds needed in the near future. While not entirely risk-free, they are a safer alternative to high-yield bonds or the stock market. For investors seeking even lower risk, money-market funds may be worth considering.
Editorial Disclaimer: Investors should conduct their own research into investment strategies before making decisions. Past performance is not indicative of future results.