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These Bond Funds Have a Built-In Advantage

Low costs will provide a sustainable edge versus competitors.

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Interest rates have hit near-zero rates, and while these rock-bottom rates bode well for spurring economic growth, yields remain stubbornly low even as investors continue to pour billions of dollars into the safety of bond funds. But interest rates are likely to tick up in the future--a fact that investors cannot afford to discount.

So how can a bond-fund investor maximize returns while also minimizing risk? Past articles on Morningstar.com, such as my colleague Russ Kinnel's recent study, have revealed that expense ratios are highly reliable predictors of a fund's likelihood to outperform its peers. This is especially true in the realm of bond funds. Given the extraordinarily low yield environment, it would be difficult to justify investing in a bond fund whose expenses take a big chunk out of its return. Moreover, managers of high-cost funds might be more likely to take big risks to offset their cost disadvantage than managers of cheaper funds.

To home in on bond funds that have low costs on their side, we used our  Premium Fund Screener to sift through our database for low-cost short- and intermediate-term bond funds.

Esther Pak does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.