As the stock market continues to take a beating, nervous investors look to bond mutual funds and exchange-traded funds (ETFs) for protection and sanity. After all, fixed income typically provides regular cash and lower volatility when markets hit turbulence.
And the markets are absolutely hitting turbulence. For instance, between Feb. 19 and March 10, not only did the S&P 500 experience a historically rapid loss of 14.8% – it experienced a dramatic rise in volatility, too, hitting its highest level on that front since 2011, says Jodie Gunzberg, chief investment strategist at New York-based Graystone Consulting, a Morgan Stanley business. The index’s losses and volatility have escalated even more since then.
Bonds offer ballast – “not only downside protection but also moderate upside potential as investors tend to seek out the safety of U.S. government and investment-grade corporate bonds amid stock market uncertainty” – says Todd Rosenbluth, senior director of ETF and mutual fund research at CFRA, a New York-based investment research company.
Bond prices often are uncorrelated to equities. Stocks typically do well in periods of economic growth, whereas bonds typically do well in periods of declining economic activity, Gunzberg says.
“Even though the current 30-day correlation has risen between stocks and bonds, the correlation between the S&P 500 and the S&P U.S. Aggregate Bond Index is still negative,” she says. “Bonds are strong diversifiers, with the exception of high yield (junk), when added to a portfolio of equities throughout different economic scenarios.” Indeed, junk debt has been punished severely of late.
Here are 12 bond mutual funds and bond ETFs to buy. These funds offer diversified portfolios of hundreds if not thousands of bonds, and most primarily rely on debt such as Treasuries and other investment-grade bonds. Just remember: This is an unprecedented environment, and even the bond market is acting unusually in some areas, so be especially mindful of your own risk tolerance.
Returns and data are as of March 17, unless otherwise noted. For mutual funds, returns and data are gathered for the share class with the lowest required minimum initial investment – typically the Investor share class or A share class. If you use an investment adviser or online brokerage, you may be able to buy lower-cost share classes of some of these funds. Yields are SEC yields, which reflect the interest earned after deducting fund expenses for the most recent 30-day period and are a standard measure for bond and preferred-stock funds.