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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.

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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 shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.

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