Intermediate-Term Bond Funds: An Anchor for Your Portfolio

Sarah Bush: The intermediate-term bond Morningstar Category is the largest bond category and home to more than 300 funds. The funds in the category are generally well-diversified options, focused on higher quality bonds. They provide a good anchor for an investor's bond portfolio and can provide valuable diversification from the equity markets.

That said, not all intermediate-term bond funds are created equal. Some funds stick entirely or almost entirely to bonds with investment-grade credit ratings. Morningstar Medalists in this group--which are often called core funds--include Silver-rated Vanguard Total Bond Market Index, which tracks the investment grade-only Bloomberg Barclays Aggregate Bond Index. Active funds including Silver-rated Baird Aggregate Bond and Silver-rated Wells Fargo Core Bond also fit the bill. 

These funds can still court losses when bond yields are on the rise, as they have been for the year to date, but they tend to hold up well during periods of equity and high-yield market stress. 

The category is also home to more adventurous funds that venture well beyond the Agg Bond index. They often hold allocations to high-yield, emerging-markets debt, and even the occasional nondollar currency. They're often referred to as core-plus funds. Gold-rated options within this subgroup include Dodge & Cox Income, Fidelity Total Bond, Metropolitan West Total Return, PIMCO Total Return, and Western Asset Core Plus. 

Risk exposures within these portfolios vary over time and so too can their performance. So, for example, Western Asset Core Plus has suffered this year due in part to its allocation to emerging-markets debt and long Treasuries, but PIMCO Total Return has turned in a relatively strong performance for the year to date. Although it has lost money, its loss was less severe than two thirds of its competitors, and impressively it did well during the recent sell-off in the equity markets.