Not All Core Bond Funds Are Created Equal
Our FIEA tool can help you dig deeper into a strategy's interest-rate and credit risk.
For investors seeking a diversified and relatively conservative fixed-income portfolio anchor, the intermediate core bond Morningstar Category is a good place to look. This category is home to strategies that invest primarily in high-quality U.S. fixed-income issues (with a maximum exposure of 5% in below-investment-grade-rated fare). Strategies in this category tend to have durations (a measure of interest-rate sensitivity) that run from four to seven years. While intermediate core bond strategies are generally built to offer protection in risk-off markets like we saw earlier this year, they can still differ significantly in the amount of interest-rate and credit risk they take on via government, corporate, or securitized debt.
The rocky ride this year provides a good example of this. In the first quarter of 2020, core strategies that had no below-investment-grade debt and lower exposure to BBB rated issues outperformed amid the coronavirus sell-off. In addition, strategies with more interest-rate sensitivity received a boost from the Federal Reserve's rate cuts over that stretch. The opposite was true in the second quarter, as the Fed's monetary policy supported credit markets while the federal-funds rate stayed near zero, boosting strategies that had a more credit-heavy profile and lessening the impact of duration on performance.
Sam Kulahan does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.