Bond fund investors often favor the safety of traditional government securities and investment-grade corporate bonds, observes, Richard Moroney, editor of Dow Theory Forecasts, one of the nation's longest running advisory services, published since 1946.
But with many funds offering paltry yields, investors might consider shifting some of their bond portfolios into less-conventional sectors. Below, we cover three attractive alternatives suitable for most investors.
High-yield bonds
High-yield bonds are a euphemism for junk bonds, the debt issued by companies unable to earn an investment-grade credit rating. Looking ahead, robust demand amid a rebounding economy bodes well for high-yield bonds, which tend to be sensitive to the outlook for economic growth.
■ Vanguard High-Yield Corporate (VWEHX) is a longtime favorite and member of our recommended Growth and Conservative portfolios. Yielding 4.2%, the fund sports an average credit quality of BB, versus B for the category. Up 3.4% in 2021, the fund has had two down years over the last 10, including a 3% dip in 2018.
Inflation-protected bonds
Treasury inflation-protected securities, or TIPS, are in demand as inflation fears persist and consumer prices move higher. TIPS principal and interest-rate payments rise and fall along with inflation.
Best suited for long-term investors, TIPS funds tend to be more sensitive to interest-rate fluctuations — upward-trending rates could hurt performance. And during periods of inflation, other bonds often offer higher yields.
■ Yielding 3.7%, Schwab U.S. TIPS (SCHP) invests in 47 securities. The fund is up 5.8% this year and boasts a five-year annualized return of 4.9%, ranking it among the top 27% of its category. The worst showing since its inception in 2010 was a decline of 8.9% in 2013.
World bonds
World bond funds, which favor investment-grade bonds, can help diversify a U.S. bond portfolio. Like other bonds, foreign bonds face interest-rate and credit risk. They’re also subject to currency, political, and country risks. Still, a rebounding global economy has helped lift growth expectations and aided corporate bonds.
■ Dodge & Cox Global Bond (DODLX) is a top pick and a member of our recommended fund portfolios. While U.S. bonds represent about 55% of the portfolio, it is 16% invested in Latin America and 14% in Europe. Yielding 2.2%, the fund has dipped 0.3% this year but has a five-year annualized return of 5.7%.
