3 Core Retirement Bond Funds To Buy
Individual bonds are better, but these bond funds look pretty safe
With interest rates finally heading back up, bonds are slowly becoming more attractive investments, particularly for retirement. We aren’t quite at the place where retired investors can plow money back into bonds, but we are headed in that direction.
Retired investors have to be particularly careful now because you don’t want to grab too many bonds that are long-term in nature. As yields rise, retired investors don’t want to have locked in to long-term rates at a lower yield.
The best approach for retired investors as far as bond funds go, is to be diversified across as many different variables as you can. There is no correct number for how many bonds or bond funds to have, because it depends on your risk profile.
My investment advisory newsletter, The Liberty Portfolio, isn’t looking seriously at bond funds at the moment, but may down the line. I like to look for bond funds that are limited in volatility, because volatility equals risk. I’ve got a few choices here that I might consider down the road.
Bond Funds: Vanguard Intermediate-Term Tax-Exempt Fund Investor Shares (VWITX)
For conservative retired investors looking for an intermediate-term fund to grab slightly more attractive rates than a short-term fund will deliver, one possibility is the Vanguard Intermediate-Term Tax-Exempt Fund Investor Shares (MUTF:VWITX). I find it difficult to complain about VWITX, because its level of diversification is through the roof, holding close to 7,400 bonds. With that degree of diversity, it would take a major catastrophe to crater the fund.
The average maturity of the bonds in the fund is 8.9 years; however, 46% of the fund’s bonds mature in a range of 10 to 20 years. That is frankly longer than I prefer, but with more than 90% of the bonds rated “A” or better, the fund is a nice choice.
Also, you’re looking at a 4.69% average coupon, which is about 6% or so, and that will depend on one’s tax bracket.
Turning to volatility, and therefore risk, the fund has a 3.85% average annual return over the past fifteen years, and a standard deviation of 3.75. Thus, there is a 95% certainty for any particular year that VWITX will deliver a return between -3.65% and 11.35%.
Bond Funds: Frost Total Return Bond Fund Investor Class Shares (FATRX)
The Frost Total Return Bond Fund Investor Class Shares (MUTF:FATRX) was recently highlighted over at Morningstar, and after looking it over, I’m a fan.
This 5-star rated fund launched just under ten years ago, right before the financial crisis, and it has performed admirably.
This is a very broadly diversified fund, with 25% in government bonds, 17% in corporate bonds and 54% in various form of securitized bonds. In that last category, 24% are asset-backed bonds, 12% are Commercial MBS, 15% are agency MBS, and only 2% are non-agency residential MBS.
57% are AAA rated, another 22% are BBB rated or higher.
We’ll see what the 10-year volatility numbers come out to, but the five-year numbers are good: 2.94% average annual return with a 2.25 standard deviation. That means you have a 95% probability of the fund returning between -1.5% and 7.5% in any given year.
Bond Funds: Eaton Vance Income Fund of Boston (EVIBX)
I do think retired investors need to carry a bit more risk if they insist on owning bonds. The Liberty Portfolio prefers owning individual corporate bonds, because that way I can drill down into the specific financials of the company itself.
With a bond fund, you are exposed to the entire sector. However, for those who need a high-yield corporate bond fund, consider the Eaton Vance Income Fund of Boston (MUTF:EVIBX).
The fund has a long track record going back to 1996, and the managers learned from the mortgage crisis, so they yanked out the riskiest and lowest-rated bonds. 84% of the bonds have yields between 4% and 8%, and 85% of them are for companies here in the US. 26% of the bonds mature in under five years, with 69% maturing in under ten years.
The volatility measurements are reasonable. The 15-year average annual return is 7.1% with a standard deviation of 8.6. That means retired investors have a 95% probability of seeing the fund return between -10% and 24.3% in any given year.
Lawrence Meyers is the CEO of PDL Capital, a specialty lender focusing on consumer finance and is the Manager of The Liberty Portfolio at www.thelibertyportfolio.com. He does not own any stock mentioned. He has 23 years’ experience in the stock market, and has written more than 2,000 articles on investing. Lawrence Meyers can be reached at TheLibertyPortfolio@gmail.com.
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Category: Bonds
