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3 Short-Term Bond Funds to Calm Interest-Rate Jitters

These funds will limit your risk—and your returns.

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If you are worried about bonds and stocks, where do you hide? Short-term bond funds are not a bad place. Interest-rate risk is measured by duration, and the funds with the shortest duration are ultrashort bond funds followed by short-term bond funds. These funds generally have very small losses when interest rates rise. That safety doesn't come free, though. If inflation is 6%, and your short-term bond fund yields 2%, you are losing money in real terms.

3 Short-Term Bond Funds to Calm Rising-Rate Jitters

These funds earn a Morningstar Analyst Rating of either Bronze or Silver. 

  1. Fidelity Conservative Income Bond (FCONX)
  2. Vanguard Short-Term Bond Index (VBIRX)
  3. Vanguard Limited-Term Tax-Exempt (VMLTX)

Fidelity Conservative Income Bond has a duration of just one tenth of a year. As a result, it lost less than peers in the first half of 2022, but the upside, of course, is quite limited. The Bronze-rated fund takes on very little credit risk, as well, so it really is just a tiny step up from a money market in risk and reward.

Vanguard Short-Term Bond Index is a step up in risk and return profile. It has a duration of 2.7 years and a high-quality portfolio to limit credit risk. The fund is heavily weighted to government bonds, but it does have a slug of high-quality corporate bonds. The Silver-rated fund charges just 7 basis points, so nearly all of the yield from the portfolio flows through to you, the investor. 

If you are investing in a taxable account, take a look at a short-term muni fund. Vanguard Limited-Term Tax-Exempt is an excellent choice. Once again, you're getting low costs and high quality. Returns are modest but so are the risks.

All of these funds work well as the second source to go to for cash after your money market and savings account. They are boring but play a useful role in a portfolio.

Russ Kinnel recommends more fund picks in 3 Good Funds Having a Great Year.  

Russel Kinnel does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.