How to Pick a First Bond Fund

johnN

https://www.investors.com/etfs-and-funds/mutual-funds/best-mutual-funds-new-manager-same-strategy/

How to Pick a First Bond Fund
We tell first-time bond investors what they need to know about intermediate core bond funds.


Michael Schramm
Jan 6, 2020
Mentioned: Baird Aggregate Bond Inst (BAGIX)
Bonds play an important role in a portfolio. Many types of bonds hold up well when stocks decline, so they can help smooth out sharp stock market swings. Funds from the intermediate core bond Morningstar Category are suitable for investors of all ages. We'll take a closer look at the category and show you how to use Morningstar research to choose a fund.

Gary1952

I went to the link and do not see that article.

Old_Skeet

Hi @johnN ... I also went to the link and failed to find the subject article. Perhaps, John will fix?

hank

Try this: https://www.morningstar.com/articles/959057/how-to-pick-a-first-bond-fund

(Generally, all one needs to do is copy / paste a portion of the text and than run a Google search.)

Agree, John should include & back-test his links. I glanced at the article and thought it looked superficial. In today’s low rate environment, picking a bond fund doesn’t exite me much. But if you just fell off the turnip truck (we’ve all been there) than maybe this is an incisive read.

johnN

Sorry wrong link..thx

msf

I agree that it's a bit superficial. And more (or is that less?).

It talks about how bonds fall into three broad categories: government, corporate, and securitized debt. It goes on to say that different funds tilt toward one or another sector. The implication is that your first bond fund should have all of these, though the mix may vary.

Then one sees FMSFX and OMBIX suggested as first funds. That's a heck of a tilt toward securitized debt. If a silver- or gold-rated fund that focuses on just one of these sectors is okay for a first fund, then why not VICSX, the silver-rated fund about which M* writes: "This is a great option for exposure to intermediate-term corporate bonds"?

Maybe it's okay for your first fund to focus on securitized debt (whose unique risks are not discussed in the article), but not on either of the other sectors? But then what about funds like FGMNX and VFIJX? M* says that they too invest almost exclusively in securitized debt.

There's a possible simple answer. The writer is merely running a screen based on M* categories and paying no attention to what funds actually hold, to whether they are appropriate funds with adequate diversification to serve as one's first fund.

That would explain why some MBS bond funds are recommended. Even though they're different from vanilla bond funds, M* doesn't separate them out into a different category (unless they're GNMAs backed by the government).

Now consider American Funds Bond Fund of America. This fund has several silver-rated share classes, so it should be on the list. But when one adds the criterion "distinct portfolio only" to the M* screen, all those silver-rated share classes are filtered out. So the writer wound up missing this fund.

Then there's VTBIX, Vanguard Total Bond Market II Index. An odd fund to suggest for one's first bond fund when Vanguard writes that it is "Available only as an underlying investment in Vanguard funds of funds or similar products."

Why include Vanguard index II but not the original VBTLX? Perhaps the writer did his own "distinct portfolio only" mental screening and thought this was the same fund as VTBIX, though it's not.

The superficiality of the column extends beyond its description of fund attributes. It doesn't make use of this information. Funds that should be considered are ignored, funds that are somewhat narrowly focused are included. What's the point of explaining what goes into funds if one is only going to ignore that and run mechanical screens?

davidrmoran

the secrets of lazy financial journalism

dtconroe

My exposure to bond investing, as well as other asset categories of investing, was through employment retirement programs. Financial Advisors would meet with our employees, and recommend a series of fund options, based on a variety of factors associated with diversification, total return objectives, and various levels of risk. As I experienced the impact of fund performance, in a variety of market conditions, I became much more interested in the funds I owned and how they were performing. At any rate, I reached a point in my life where I was being asked for advice about fund choices, and my standard response was to wade into the bond investing world, with relatively low risk and safer bonds, study what impacted performance, and start forming ideas of how to diversify into other bond categories and learn by ownership to a large extent. I think a good place to begin is to select an investment grade short term bond fund, and move some of your cash out of a banking account, and learn about what is involved in watching some of the fluctuations of performance in this bond fund, in order to produce a higher yield or total return, than you would get from a savings or money market fund. That is a good first step before moving into more risky and more volatile bond funds from other categories--but I always think its important to have a high risk of success with safer options and then slowly evolve to more risky options. Try to learn by owning a fund, and watching performance, but do it in a way where you can minimize odds of trauma with beginning investment decisions.