5 Short-Term Bond Funds That Consistently Deliver

As 2023 winds down and stubbornly high bond yields remain, so does the allure of short-term fixed-income funds. The Federal Reserve has raised short-term interest rates by 100 basis points so far in 2023 on top of 2022′s unprecedented hikes. As high inflation and economic uncertainty persist, investors may seek refuge in shorter-term bond funds to await a clearer path forward or look to enhance liquidity returns for cash not immediately needed.

The year-to-date performance of most funds in the ultrashort and short-term bond Morningstar Categories shows how opting for a fund with muted interest-rate risk, or shorter durations, can preserve and even increase capital amid rising rates. Indeed, the former category, whose constituents typically have a duration of 1.0 year or less, gained 4.4% on average through Oct. 27, 2023, and the latter, with durations of 1.0 to 3.5 years, gained 2.5%. In contrast, intermediate core bond funds, whose durations are in the range of 3.5 to 6.0 years, lost 2.2% on average.

Whether investors are seeking cash alternatives or reducing interest-rate risk, the ultrashort and short-term bond categories offer a wide variety of strong options between aggressive and conservative strategies to fit within a broad asset allocation.

Baird Short-Term Bond BSBIX earns a Morningstar Medalist Rating of Gold and consistently offers sensible exposure to high-quality, short-term bonds. The fund focuses on U.S.-dollar-denominated cash bonds of investment-grade quality without the complications of derivatives or leverage, or the need to clear lofty fee hurdles. The fund’s conservative tilt compared with riskier peers can cause this strategy to generate lower yields, but it has still delivered returns in line with competitors’ since earning an above-average Medalist Rating in 2016. For the year to date through Oct. 27, the strategy’s 2.9% gain held up better than two thirds of peers because of its duration-neutral style and overweight in investment-grade credit. Long-term returns can look muted compared with more aggressive peers, but this higher-quality posture should help the fund hold up better than rivals when markets are stressed.

FPA New Income FPNIX, which has a Bronze rating and has been one of Morningstar’s higher-rated funds since 2011, returned 1.7% annualized over the trailing 10 years through Oct. 27. Its shareholder-focused approach and objective to deliver positive returns over a 12-month period have helped this strategy compete with other top short-term bond offerings. Its top-quartile absolute and risk-adjusted (as measured by its Sharpe ratio) returns make this a compelling option. The fund’s approach has also contributed to top-decile returns for the year: Its 3.8% gain outpaced its benchmark’s and peers’ 2.3% and 2.5% gains, respectively, through Oct. 27. This strategy’s ability to successfully navigate volatile markets and hold up in periods of stress makes it a strong pick.

Silver-rated Fidelity Short Term Bond FSHBX is another conservative option and assumes less interest-rate and credit risk than more adventurous peers. While this caution has resulted in lower long-term returns, this approach has helped the strategy in more challenging environments. Since earning its above-average Medalist Rating in 2011, the fund has underperformed compared with riskier peers, but a higher Treasuries allocation and a shorter duration (1.7 years as of October 2023) than the peer median have led to smaller losses than rivals through these rocky markets. The strategy is well suited for rising-yield environments; its 2.8% year-to-date return through Oct. 27 ranked near the upper third of rivals.

For investors seeking a low-cost passive option, Silver-rated Vanguard Short-Term Bond Index VBIRX is an economical offering. It tracks the Bloomberg U.S. 1-5 Year Government/Credit Index and is more conservative than other actively managed rivals. The strategy features about 75% in Treasuries with the remainder in investment-grade corporate bonds and will normally feature a lower yield than peers, but its razor-thin fees help it compete head-on. This strategy shies away from credit risk but often has a longer duration than peers. As expected, long-term returns don’t stand out, but it won’t deliver any surprises either. For the year to date through Oct. 27, the fund’s returns have been positive, but its 1.7% gain trailed the average peer’s 2.5% because of a large Treasury allocation and resulting lower yield. This fund should hold up well when credit spreads widen but may lag in rising-rate environments. In any environment, its ongoing fee advantage will help performance here.

Silver-rated Pimco Short-Term PTSHX, which is included in the ultrashort bond category, has long delivered strong returns for investors seeking even lower interest-rate risk and draws on an investment toolkit that is broader than most. Jerome Schneider, a former Morningstar Manager of the Year winner, guides this diversified strategy that features corporate, securitized, non-U.S. developed, and emerging-markets debt. The fund can be more volatile at times than other ultrashort bond peers and therefore is better suited to investors that can assume a bumpier ride. Over the trailing 10 years, the fund’s 1.9% return through Oct. 27 beat its median peer’s 1.4% and ranked among the category’s top decile. Also, Pimco’s sibling ultrashort offerings cater to different investors’ risk objectives: Pimco Short-Asset Investment PAIDX is more conservative, while Pimco Enhanced Short Maturity Active ETF MINT balances both strategies in an exchange-traded fund wrapper.