The U.S. bond market bounced back in 2023 after a tough 2022: The Morningstar US Core Bond Index finished the year up 5% after falling nearly 13% in 2022. “Following the worst bond market ever in 2022, fixed-income markets largely normalized and rebounded in 2023,” says Morningstar chief U.S. market strategist Dave Sekera.
What’s next for the bond market?
“We forecast that the Fed will lower the federal-funds rate at its March 2024 meeting and continue to cut rates further to approximately 3.75% by the end of the year,” he notes. “We further project that the Fed will continue cutting rates, dropping to 2.25% by the end of 2025.” Sekera suggests investors favor longer-duration bonds, locking in their higher interest rates.
Regardless of where interest rates and bond yields are headed, there’s a case to be made for holding bond funds in your portfolio. One of the biggest reasons to do so is that bonds are still less risky over the long term than stocks.
Are Bond Funds a Good Investment?
Investors rely on bonds for many reasons: funding short-term goals, diversifying a stock-heavy portfolio over the long term, or generating income during retirement, to name a few. Before getting down to choosing a bond exchange-traded fund or mutual fund, step back and consider why you need one: What role will a bond fund play for you?
Once you know the need it’s filling, figure out whether a taxable-bond fund or municipal-bond fund is a better choice for you. If you’re investing via a tax-deferred account like an IRA or 401(k), a taxable-bond fund will be the better match. If you’re investing in a taxable account, though, a fund that buys municipal bonds might be the better choice on an aftertax basis.
A good place to start your search for the best bond funds to buy—both taxable and municipal alike—is with the Morningstar Medalist Rating. Mutual funds and ETFs that earn our highest rating of Gold are those that we think are most likely to outperform over a full market cycle.
The 61 Best Bond Funds to Buy
These ETFs and mutual funds all land in one of the bond Morningstar Categories and have at least one share class that earns our top Medalist Rating of Gold with 100% analyst coverage as of January 2024.
- American Funds Bond Fund of America ABNDX
- American Funds Limited-Term Tax-Exempt Bond FLTEX
- American Funds Tax-Exempt Bond TFEBX
- American Funds Tax-Exempt Fund of California EXCAX
- American Funds Tax-Exempt Preservation Portfolio TYEFX
- American Funds U.S. Government Securiies RGVFX
- Baird Aggregate Bond BAGSX
- Baird Core Plus Bond BCOSX
- Baird Short-Term Bond BSBSX
- Baird Ultra-Short Bond Investor BUBSX
- BlackRock High Yield Bond BHYIX
- BlackRock Strategic Global Bond MAWIX
- BlackRock Strategic Income Opportunities BASIX
- BlackRock Total Return MDHQX
- Dodge & Cox Global Bond DODLX
- Dodge & Cox Income DODIX
- Fidelity Investment Grade Bond FBNDX
- Fidelity Tax-Free Bond FTABX
- Fidelity Total Bond FTBFX FBND
- Hartford Strategic Income HSNVX
- iShares Core Total USD Bond Market ETF IUSB
- iShares Core U.S. Aggregate Bond ETF AGG
- JPMorgan Government Bond HLGAX
- JPMorgan Limited Duration Bond ETF JPLD
- JPMorgan Mortgage-Backed Securities JMBUX
- Loomis Sayles Core Plus Bond NEFRX
- Muzinich Credit Opportunities MZCIX
- PGIM High Yield PHYGX
- PGIM Short-Term Corporate Bond PSTQX
- Pimco Diversifed Income PDIIX
- Pimco Enhanced Short Maturity Active ETF MINT
- Pimco Enhanced Short Maturity Active ESG ETF EMNT
- Pimco Global Bond Opportunities (US-Hedged) PGBIX
- Pimco GNMA and Government Securities PDMIX
- Pimco Income PIMIX
- Pimco International Bond (Unhedged) PFUIX
- Pimco International Bond (USD - Hedged) PFORX
- Pimco Long Duration Total Return PLRIX
- Pimco Short Asset Investment PAIDX
- Pimco Total Return PTRAX
- Pimco Total Return ESG PTGAX
- Schwab Short-Term U.S. Treasury ETF SCHO
- Schwab U.S. TIPS ETF SCHP
- SPDR Portfolio Short-Term Treasury ETF SPTS
- T. Rowe Price Floating Rate PRFRX TFLR
- T. Rowe Price Tax-Free High Yield PRFHX
- Vanguard California Intermediate-Term Tax-Exempt VCADX
- Vanguard California Long-Term Tax-Exempt VCLAX
- Vanguard High-Yield Tax-Exempt VWALX
- Vanguard Intermediate-Term Corporate Bond Index/ETF VICSX VCIT
- Vanguard Intermediate-Term Tax-Exempt VWIUX
- Vanguard Limited-Term Tax-Exempt VMLUX
- Vanguard Long-Term Bond Index/ETF VBLLX BLV
- Vanguard Long-Term Corporate Bond Index/ETF VBLLX VCLT
- Vanguard Long-Term Tax-Exempt VWLUX
- Vanguard Short-Term Corporate Bond Index/ETF VSTBX VCSH
- Vanguard Short-Term Inflation-Protected Securities Index/ETF VTAPX VTIP
- Vanguard Short-Term Treasury Index/ETF VSBSX VGSH
- Vanguard Tax-Exempt Bond ETF VTEB
- Vanguard Total Bond Market Index/ETF VBTIX BND
- Vanguard Ultra Short-term Tax-Exempt VWSUX
The list of the best bond funds covers a hodgepodge of investment styles. It includes bond funds focusing on fixed-income securities with different maturities and credit qualities and features both taxable-bond funds and municipal-bond funds. It encompasses the best bond index funds and the best actively managed options, too. Morningstar portfolio strategist Amy Arnott suggests in her Role in Portfolio framework that investors stick with short- and intermediate-term bond funds as core holdings in their portfolios. Bond funds that focus exclusively on some other types of securities—such as corporate bonds, international bonds, long-term bonds, high-yield bonds, and so on—should play more limited roles in a portfolio.
What Is a Taxable-Bond Fund?
Taxable-bond ETFs and mutual funds invest in fixed-income securities issued by governments and corporations.
The “right” type of taxable-bond fund for you comes down to personal preferences. Will you forgo the incremental yield and diversification benefits that high-quality long-term bond funds typically offer for some protection against rising interest rates? Do you want to stick with the highest-quality bonds you can find, or are you willing to delve into lower-quality bonds in exchange for higher yields? Will you dabble in world bonds for yield pickup—and if yes, do you want currencies in the mix?
Here are several broad types of taxable-bond funds to consider:
Domestic Taxable-Bond Funds: ETFs and mutual funds that land in the long-term, intermediate-term, short-term, and ultrashort bond Morningstar Categories cluster here. These bond funds blend government bonds, asset-backed or mortgage-backed securities, investment-grade and high-yield debt, and a modest dose of international bonds. Although some funds are more income-oriented or more opportunistic than others, most provide decent exposure to a variety of bond types.
Flexible-Bond Funds: Multisector and nontraditional bond ETFs and mutual funds land here. Like domestic taxable-bond funds, flexible-bond funds can invest across a mix of bond types. Unlike domestic taxable-bond funds, flexible-bond funds invest more aggressively in lower-quality bonds and/or international debt. Nontraditional bond funds, in particular, enjoy a high degree of interest-rate flexibility and may employ shorting. Simply put, these are the least constrained bond funds.
Government-Bond Funds: The highest-quality taxable-bond mutual funds and ETFs reside in this group. To be included in one of the U.S. government-bond categories, a fund must keep at least 90% of its assets tucked in government securities. Funds that invest strictly in Treasuries, strictly in mortgage-backed securities, or in some combination of the two populate the group. There are three government-focused categories included here, broken down by duration: short government, intermediate government, and long government.
Corporate-Credit Funds: These ETFs and mutual funds favor bonds issued by corporations. Categories in this group include corporate-bond funds, high-yield bond funds, and bank-loan funds. Corporate-bond funds focus on bonds rated investment-grade; these funds, therefore, exhibit some degree of interest-rate sensitivity. High-yield bond funds target bonds rated as below-investment-grade; these funds invite more credit risk than interest-rate risk. Finally, bank-loan funds also invest in securities rated as below-investment-grade, and their interest payments are periodically reset. Because of their floating rates, bank loans theoretically have less sensitivity to interest-rate movements.
World- and Emerging-Markets Bond Funds: The ETFs and mutual funds in this group favor fixed-income securities issued by governments and corporations outside of the United States. That’s about the only thing they all have in common. World-bond funds must invest at minimum 40% of their assets in non-U.S. debt, but some exclude U.S. debt entirely, or focus on corporates rather than governments, or hedge currencies—or don’t. Emerging-markets debt funds, meanwhile, keep at least 65% of their assets in developing-markets debt; but here, too, there are significant variations in currency strategies.
Inflation-Protected Bond Funds: As their names suggest, inflation-protected bond ETFs and mutual funds seek to protect investors from rising inflation. As such, these funds invest in securities whose principal values adjust along with the rate of inflation.
What Is a Municipal-Bond Fund?
Municipal-bond ETFs and mutual funds invest in bonds that are issued by state and local governments to finance capital expenditures. Unlike taxable bonds, municipal bonds provide tax advantages that can be especially appealing to higher-income investors who are investing via taxable accounts. How? Municipal bonds are often exempt from federal taxes as well as state and local taxes.
On the surface, municipal bonds appear to yield less than taxable bonds of similar quality and maturity—but that’s before taxes are taken into consideration. How can you determine whether municipal bonds are a good choice for you? Use a tax-equivalent yield calculator to see how a given municipal-bond ETF or mutual fund’s yield compares with the yield of a similar maturity and quality taxable-bond ETF or mutual fund, given your particular tax circumstances.
The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar’s editorial policies.