Best Bond Funds for 2022

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Veneta Lusk is a family finance expert and journalist. After becoming debt free, she made it her mission to empower people to get smart about their finances. Her writing and financial expertise have been featured in MSN Money,, Yahoo! Finance, Go Banking Rates and The Penny Hoarder. She holds a degree in journalism from the University of North Carolina - Chapel Hill.

Every time you turn on the TV or look at financial news, the stock market is making headlines. One reason for the constant coverage is stock volatility. While bonds get less coverage, they offer a way to counterbalance the ups and downs of the stock market.

There are many types of bonds, which can get overwhelming. One option to consider is bond funds. There are many bond funds available to investors depending on their goals. The best bond funds are the ones that suit your needs.

Let’s look at what bond funds are and how to find ones that work best for you.

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What is a bond fund?

A bond fund is a mutual fund that invests only in bonds. It’s a way for investors to pool their money and invest in multiple bonds. Just like stock mutual funds, they can be managed by a professional who decides how to invest the pooled capital.

Corporations and governments issue bonds to raise capital. When you buy a bond, you’re essentially lending money to an entity for a certain period. In exchange, you can expect to receive interest until the maturity date.

Rather than buying bonds issued by a single entity, you can buy bond funds that invest in tens or hundreds of bonds. Some bond funds focus on a specific type of bonds such as U.S. Treasuries while others focus on the broad market. Bond funds offer diversification since they invest in many different securities.

Because bond funds are a type of mutual fund, they come with expenses that include the cost of managing the fund. When reviewing a fund’s prospectus, note the sales charges (or loads), redemption fees, account management fees, and so on.

There are two types of bond funds: bond mutual funds and bond exchange-traded funds (ETFs). Bond mutual funds are traded at the end of the trading day. Bond ETFs can be bought and sold at any time while the stock exchanges are open.

Why invest in bond funds?

Just like with mutual funds, bond funds offer investors a way to diversify their investments. Since bond funds own many individual bonds of varying maturities, a single bond’s performance has little impact.

If you invest in a broad market fund, it also means you get exposure to different bond sectors, including mortgage-backed bonds, corporate bonds, U.S. government bonds, and more. Investing in a bond fund offers a way to get more diversification for a lower capital investment.

Since bonds offer more conservative returns compared to stocks, they can help balance out your portfolio. Stocks can go up or down sharply depending on market conditions or the latest economic news. Bonds, on the other hand, are the Old Faithful of investments, paying out interest and/or dividends on a schedule.

While bonds don’t have the draw of potential life-changing payouts, they offer stability and balance to an investment portfolio. Bond funds pay out monthly interest, which can serve as a source of regular income.

Certain types of bond funds such as those invested in municipal bonds can help reduce your tax burden. This can be helpful to those in a higher tax bracket who can benefit from having tax-free investments.

Best bond funds for 2019

Below are five bond funds to consider including as part of your investment strategy. Which one works for you depends on your risk tolerance and personal goals for your portfolio’s growth.

The bond funds are ordered by the annual assets under management to keep the list impartial.

Vanguard Total Bond Market ETF (BND)

The Vanguard Total Bond Market ETF (BND) offers broad exposure to U.S. investment-grade bonds. The fund’s goal is to track the U.S. bond market returns. It’s a good option for medium- to long-term investors looking for a reliable income stream.

This bond fund can help diversify the risks of stocks in a portfolio since share value goes up and down modestly. BND invests in a broadly diversified collection of securities that tracks the performance of the Bloomberg Barclays Aggregate Float Adjusted Index.

With more than 8,600 bonds and average effective maturity of 8.2 years, this fund is better for those looking at long-term options. The fund’s total net assets are $232 billion with almost 64 percent held in U.S. government securities.

The 30-day SEC yield currently sits at 2.24 percent and the expense ratio is 0.035 percent. This makes it the lowest cost fund to own on this list.

iShares iBoxx Investment Grade Corporate Bond FUND (LQD)

The iShares iBoxx Investment Grade Corporate Bond Fund (LQD) offers investors exposure to U.S. investment-grade corporate bonds. It’s a good option for those looking for stability and income options.

This fund tracks the Markit iBoxx USD Liquid Investment Grade Index, which represents a broad section of the U.S. dollar-denominated liquid investment-grade corporate bond market.

With more than 2,000 bonds and average effective maturity of 13.08 years, this fund is better for those looking at long-term investments. The fund’s total net assets are $35 billion with almost 26 percent held in banking securities.

The 30-day SEC yield currently sits at 2.89 percent and the expense ratio is 0.15 percent. This makes it one of the lowest cost funds to own on this list.

Vanguard Short-Term Bond FUND (BSV)

The Vanguard Short-Term Bond fund (BSV) tracks the performance of the Bloomberg Barclays U.S. 1-5 Year Government/Credit Float Adjusted Index. This passively managed fund offers diversified exposure to investment-grade, short-term U.S. government, corporate, and international dollar-denominated bonds.

BSV is a good option for those looking for a conservative investment. More than half of the portfolio is invested in U.S. Treasury and agency securities, and the average maturity is less than three years.

This bond fund has more than 2,400 holdings for a total of $22.6 billion assets under management, with an expense ratio of 0.07 percent.

The current 30-day SEC yield is 1.74 percent, which is the lowest return of all funds on this list. As a tradeoff, the fund price is not as sensitive to interest rate fluctuations.

Fidelity Capital & Income Fund (FAGIX)

If you’re willing to take on more risk with bond investing, consider the Fidelity Capital & Income Fund (FAGIX). Since the fund invests in equity and debt securities, including defaults, there is a greater risk of default and increased volatility.

FAGIX offers exposure both to domestic and foreign bonds, and invests in companies in troubled and uncertain financial conditions. The weighted average maturity of the bonds is 9.3 years and the current 30-day SEC yield is 4.06 percent.

The fund’s total net assets are nearly $12 billion with an expense ratio of 0.69 percent, which is the highest on this list.

T. Rowe Price Short-Term Bond (PRWBX)

The T. Rowe Price Short-Term Bond Fund (PRWBX) invests in short- and intermediate-term investment-grade securities. This includes corporate, government, and asset-backed securities.

At least 80 percent of the fund’s capital is invested in bonds with an average effective maturity not to exceed three years.

The fund’s total net assets are $5.43 billion with more than 80 percent held in domestic bonds. Most securities have a one-to-five year maturation with a current 30-day SEC dividend yield of 2.5 percent.

Dividends are paid out monthly with any applicable capital gains distributed annually. With an expense ratio of 0.47 percent, this is one of the pricier bond funds to own on this list.

The bottom line on bond funds

There are many bond funds that can help you add another dimension to your investment portfolio. They behave differently than stocks and can offer a good balance to the volatility of the stock market.

How much of your portfolio should be invested in bonds and stocks depends on your personal risk tolerance. If you think you want to include bonds in your portfolio, the five bond funds above are a good place to get you started.

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Last Updated January 5, 2022

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