The Best Short-Term Bond Funds
These ETFs and mutual funds invest in different types of short-term bonds and earn Morningstar Analyst Ratings of Gold.
It’s been a tough year for bond investors. As of this writing, the Morningstar US Core Bond Index, a proxy for the broad bond market, is down nearly 10% for the year so far. Stubbornly high inflation and rising interest rates have contributed to what many are calling the historic bear market for bonds.
Should bond investors move into shorter-term bonds, which are less affected by interest-rate changes than longer-term bonds?
Morningstar director of personal finance and retirement planning Christine Benz says that decision should depend on your time horizon and when you need to tap into the money, not on what’s happening in the bond market. If you’re planning to spend these dollars in six to 10 years, intermediate-term core bond funds remain the place to be despite the current bond market volatility, she says. But if you’re saving for a shorter-term goal in the next three to five years, short-term bond funds are better options.
Investors looking for good short-term bond funds should prioritize those with low expense ratios, or fees. Fees eat into returns, so it’s especially important to favor low-cost short-term bond funds, whose return opportunity is, by their very nature, modest.
Here is Morningstar’s list of the best short-term bond funds and exchange-traded funds to invest in now.
These funds land in one of the short-term taxable-bond Morningstar Categories and earn the top Morningstar Analyst Rating of Gold for at least one of their share classes.
Here’s a little bit about each of these funds. All data is as of June 9, 2022.
This actively managed short-term bond fund is led by an experienced team that invests in high-quality corporate bonds and securitized credit, as well as government bonds. The team keeps the fund’s duration (which is a measure of interest-rate sensitivity) in line with the Bloomberg U.S. Government/Credit 1–3 Year Index, and it adds value through adept security selection and sector rotation, with a bias toward nongovernment bonds. That means the fund takes on more credit risk than some other short-term bond funds, but that hasn’t hurt its risk-adjusted returns, notes Morningstar senior analyst Gabriel Denis.
This actively managed short-term bond fund takes a longer-duration approach, with a goal of outperforming the Bloomberg 1–5 Year Credit Index by 0.60% annually before expenses. The management team, which is highly experienced and deep, seeks that outperformance through security and sector rotation, not excess duration management. The team’s focus is on corporate bonds, where it favors bonds rated A or BBB rather than higher-quality paper. The fund takes on more credit risk than other short-term bond funds, but its long-term record is strong relative to other funds in the category, says Morningstar strategist Eric Jacobson.
This index fund—available as both a mutual fund and as an ETF—tracks the Bloomberg U.S. 1–5 Year Corporate Bond Index, which features U.S. investment-grade corporate bonds with between one and five years in remaining maturity. Like other funds featured here, this fund takes on a fair amount of credit risk. That being said, the fund provides accurate access to the short-term investment-grade bond market at a low cost and has been a competitive long-term performer.
Unlike other funds included here, Vanguard Short-Term Treasury invests exclusively in short-term U.S. Treasuries. An index fund that’s available as both a mutual fund and an ETF, it tracks the Bloomberg U.S. Treasury 1–3 Year Index which, as its name suggests, focuses on U.S. Treasuries with one to three years until maturity. Given its very high-quality focus, the fund takes on minimal credit risk. Interest-rate risk holds more influence over performance, but given the fund’s emphasis on the short end of the yield curve, even that risk is muted. Ultralow expenses only add to the appeal here.
Expenses are an especially important factor to consider when investing in short-term bond funds—but they’re key when evaluating other types of funds, too. For more tips about how to find good funds, read Morningstar’s Guide to Fund Investing. And check out our Best Funds lists across a variety of categories, including top core stock funds, the best small-company funds, highly rated growth stock funds and value stock funds, good international-stock funds, and even the best taxable-bond funds, which includes the funds featured here.
Susan Dziubinski does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.