What's Behind Your Bond Fund's Returns?
Bond funds' past performance isn't necessarily indicative of skill.
A version of this article appeared in the September issue of Morningstar ETFInvestor. Download a complimentary copy of ETFInvestor here.
Bond investors require compensation for bearing greater credit and interest-rate risk through higher expected returns, or yields. Fixed-income managers can--and often do--boost returns by taking more credit or interest-rate risk than their benchmarks, but that does not necessarily require skill. Investors can do that on their own with low-cost index funds, so it is hard to justify paying high fees for performance that is simply compensation for risk. And while risk taking can pay off in one period, it may lead to underperformance in another.
Alex Bryan does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.