Over the past few years, bond prices have experienced volatility due to interest rate hikes by the Federal Reserve in response to high inflation. However, with the possibility of rate decreases on the horizon, investors may find appealing yields in short-term bonds.
Here’s a rundown on short-term bond funds and some top options to consider for your investment portfolio.
Understanding Short-Term Bond Funds
Short-term bond funds are investment vehicles, such as mutual funds and exchange-traded funds (ETFs), that typically focus on government and corporate bonds with maturities of less than five years. These shorter-term bonds are less sensitive to interest rate fluctuations compared to longer-term bonds, providing investors with some protection if rates rise. Remember, bond prices move inversely to interest rates, so when rates go up, bond prices go down 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 their current market value.
Is Investing in Short-Term Bonds Right for You?
Short-term bond funds can be suitable for a wide range of investors, especially those saving for short-term goals. If you anticipate needing your money within the next three to five years, investing in short-term bonds can offer a decent return without exposing you to excessive risk.
Prior to investing, pay attention to the fund’s expense ratio, as lower expenses generally benefit investors in the long run.
Top Picks for Short-Term Bond Funds
*Data accurate as of August 29, 2024.
SPDR Portfolio Short-Term Corporate Bond ETF (
SPSB
)
The SPDR Portfolio Short-Term Corporate Bond ETF aims to mirror the performance of the Bloomberg U.S. 1-3 Year Corporate Bond Index. This fund provides exposure to U.S. corporate bonds with maturities ranging from one to three years.
- SEC yield: 4.66 percent
- Expense ratio: 0.04 percent
- AUM: $7.7 billion
iShares 1-5 Year Investment Grade Corporate Bond ETF (
IGSB
)
This iShares ETF aims to replicate the performance of an investment-grade corporate bond index with maturities between one and five years. Holdings include bonds issued by major companies like Bank of America, JPMorgan Chase, and Microsoft.
- SEC yield: 4.67 percent
- Expense ratio: 0.04 percent
- AUM: $20.9 billion
Schwab 1-5 Year Corporate Bond ETF (
SCHJ
)
The Schwab 1-5 Year Corporate Bond ETF seeks to track an index measuring the performance of the short-term U.S. corporate bond market. This fund holds corporate bonds with remaining maturities between one and five years.
- SEC yield: 4.67 percent
- Expense ratio: 0.03 percent
- AUM: $446.0 million
Vanguard Short-Term Bond ETF (
BSV
)
The Vanguard Short-Term Bond ETF aims to replicate the performance of a market-weighted bond index composed of investment-grade bonds with an average maturity of 1-5 years. This fund includes government bonds, high-quality corporate bonds, and investment-grade international dollar-denominated bonds.
- SEC yield: 4.12 percent
- Expense ratio: 0.04 percent
- AUM: $33.4 billion
Fidelity Short-Term Bond Fund (FSHBX)
The Fidelity Short-Term Bond Fund aims to generate a high level of current income while safeguarding capital. It typically invests at least 80 percent of its assets in various types of investment-grade debt and maintains an average maturity of three years or less.
- SEC yield: 4.73 percent
- Expense ratio: 0.30 percent
- AUM: $2.3 billion
Summary
Short-term bond funds offer a suitable investment option for funds needed in the near future. While not entirely risk-free, they are safer than high-yield bonds or the stock market. Investors seeking even lower risk with potential yields may consider money-market funds.
Editorial Disclaimer: It is recommended that all investors conduct their own independent research on investment strategies before making decisions. Additionally, past performance of investment products is not indicative of future price appreciation.