How the Largest Bond Funds Did in 2022

Investors generally don’t expect double-digit returns from their bond funds, especially not those in negative territory.

Bond funds usually are meant to play a stable part in portfolios, providing diversification from more volatile stocks.

But 2022 wreaked havoc on bonds and the funds that hold them as the Federal Reserve raised short-term interest rates at an unprecedented pace to combat 40-year highs in inflation.

Because bond prices move in the opposite direction of yields, the Fed’s rate hikes inflicted record losses on many bond funds. That included the bond funds that are the most widely held by investors.

The 20 largest bond mutual funds and exchange-traded funds all posted their worst year in history. For all but four of those funds, it was the second consecutive year of declines, and broadly, two difficult years have pushed longer-term results negative for many bond mutual funds and exchange-traded funds.

Largest Passively Managed Bond Funds’ Performance

The largest bond fund, the $315.2 billion Vanguard Total Bond Market (VBMFX) declined 13.3%, its worst year ever. The $137.2 billion Vanguard Total International Bond Index (VTIFX) held up slightly better, losing 12.9%.

In a drama that played out all year, funds with more interest-rate exposure—generally those owning longer-term maturities—fell the hardest.

Only short-term bond funds relegated losses to single digits among the largest passive funds. The Vanguard Short-Term Bond Index (VBISX) declined 5.6%.

Among corporate bond funds, one of the largest was also the one hardest hit last year, as iShares IBOXX Investment Grade Corporate Bond ETF (LQD) lost 18%. “The fund’s average duration (a measure of interest-rate sensitivity) tends to be in the highest quartile of its category,” wrote Morningstar manager research analyst Lan Anh Tran.

The largest inflation-protected bond fund also underperformed relative to other funds in the category. The iShares TIPS Bond ETF (TIP) lost 12.1%, while the average inflation-protected bond fund ended 2022 down 10.6%. The fund’s longer duration hurt the fund. “Interest-rate risk is the primary driver of category relative returns,” wrote associate analyst Mo’ath Almahasneh.

Largest Actively Managed Bond Funds’ Performance

Active funds tended to hold up better than their passive counterparts during 2022. The largest active bond fund, Pimco Income (PIMIX), lost 7.8%, and American Funds Bond Fund of America (ABNDX) declined 12.7%.

Dodge & Cox Income (DODIX) was one of the best in the intermediate-core-plus category, keeping losses to 10.9%. The fund has also provided stability for investors on a longer-term basis. Dodge & Cox Income is up 1.1% over the past five years, while the average intermediate-core-plus fund is up only 0.1%.

Long-Term Bond Fund Performance

Consecutive down years have punished longer-term results for some of the most widely held bond funds, as they have for the bond market in general. But some of the largest funds have held onto gains over the last five years.

Investors in the Vanguard Total Bond Market are down 2.8% over the past three years on an annualized basis, and 0.1% over the past five years.

The $37.8 billion BlackRock Strategic Income Opportunities (BSIIX) and iShares TIPS Bond ETF are up the most over the past five years among the largest bond funds, both returning just under 2% on an annualized basis.