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Bond Squad
6 good funds for the income investor
Looking to boost the take from your investments? Check out these yield-generating bond funds.
By Morningstar
Bond yields have pushed higher in recent weeks but are still not far off their year-ago levels. For example, the 10-year Treasury bond still yields less than 4.3%, while the two-year note yields just 4%. Those numbers aren't likely to generate much buzz among bond investors, especially those with fond memories of the late 1990s, when a number of risk-free money-market funds were returning more than 5% per year.
But while yield has been hard to come by (as the chart of the 10-year Treasury note yield for the last year shows), a number of bond funds continue to churn out extra income by investing in unloved, under-followed or riskier areas of the bond market.
This month, we highlight a few of our favorite yield generators. We've chosen these funds not only for their added yield, but because they're also reasonably priced and well managed. It's important not to choose funds based on yield alone, as yield can sometimes mask poor management or high costs. Note: We specifically avoided junk-bond funds. While they offer more yield, they take on considerably more credit risk than the funds listed below.
William Blair Income
A number of short-term bond funds, including Morningstar Analyst Picks Fidelity Short-Term Bond (FSHBX) and Vanguard Short-Term Investment-Grade (VFSTX), recently yielded about 3.8%. William Blair Income, (WBRRX) on the other hand, yielded roughly 4.1%. That added yield owes much to the fund's mid-quality holdings, which recently included both Ford (F, news, msgs) and General Motors (GM, news, msgs). With a hefty dose of bonds rated A and BBB (the lowest investment-grade bond ratings) and a little more interest-rate risk than a typically short-term bond fund, investors should be prepared for a few bumps in the road here. Still, we think the fund makes a good case for itself.
Metropolitan West Low Duration and Met West Total Return
Loyal Bond Squad readers know Metropolitan West Low Duration (MWLDX) and Met West Total Return (MWTRX) well. The funds got absolutely crushed when the corporate-bond market tanked in 2002, but good credit research helped the funds earn back most of that lost ground in 2003.
Related news and commentary on MSN Money
Both funds continue to take on more credit risk than their average peers. But, with strong management and reasonable costs, we think yield-hungry investors will like what they find here. Low Duration, which lands in the short-term bond category, recently yielded 4.2%, while Total Return, which lands in the intermediate category, yielded 5.2%.
Westcore Plus Bond
Investors comfortable moving up the interest-rate ladder typically find more yield in the intermediate-bond category, but yield has been hard to come by there, too. Analyst Picks Vanguard Total Bond Market Index (VBMFX) and Dodge & Cox Income (DODIX) recently yielded just 4.3%. Westcore Plus Bond (WTIBX), however, yielded a healthy 5.5%. Like the William Blair fund, the Westcore fund takes on more credit risk than its average category peer. But like that fund, it has managed its risks well over the long term. And with a below-average expense ratio, lots of yield flows directly to investors.
T. Rowe Price Corporate Income
The T. Rowe Price Corporate Income (PRPIX) fund generates added yield by investing heavily in mid-quality corporate bonds. In fact, it recently held more than two-thirds of its assets in BBB rated bonds. The fund's mid-quality holdings make the portfolio vulnerable to economic slowdowns -- but pump out lots of income. Overall, we think it makes a good pick for investors looking to add some yield to high-quality bond portfolios. The fund recently yielded 4.9%.
Vanguard Long-Term Investment-Grade
Long-term refers to the average maturity of the Vanguard Long-Term Investment-Grade (VWESX) bond holdings, but it could also refer to the appropriate time horizon for the fund's investors. Along with added credit risk, this fund takes on a considerable amount of interest-rate risk and can struggle in rising-interest-rate environments. We consider it more of a supporting player than a core portfolio holding. However, the fund's long-term corporate holdings churn out lots of yield, while its rock-bottom expense ratio provides it a huge sustainable advantage over the competition. The fund's yield recently checked in at 5.2%.
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