Top short-term bond funds

9/15/2008


One key to successful investing is finding a place to park your cash reserves. Enter Vanguard Short-Term Investment-Grade ($10.46; VFSTX), our longtime favorite among short-term bond funds.

The fund, with a good record of holding its value in down markets, yields 4.6%. Since 2002, our Buy List and Long-Term Buy List have invested part or all of their cash positions in the fund.

While Vanguard Short-Term Investment-Grade boasts an outstanding track record and remains our top pick, the Forecasts acknowledges a fly in the ointment: Your broker may charge you an arm and a leg to trade the fund. Most fund supermarkets charge a fee to trade Vanguard funds, while some don’t make them available.

With that in mind, we screened for short-term bond funds with the following characteristics:

-Availability at major discount brokers with no transaction fee.

-Strong and consistent performance, with five-year total returns above the category average.

-Below-average expense ratios.

-Competitive yields.

We review three standouts below.

 

The Janus Short-Term Bond ($3; JASBX) fund seeks to provide current income with limited volatility. At the end of July, the fund held 73 bonds, with half of assets in U.S. Treasury notes and bonds. The fund has a duration of only 1.7 years. The shorter the duration, the less sensitive a fund is to shifts in interest rates. At 0.64%, the expense ratio is below the category average of 0.95%. Janus posted a three-year annualized return of 3.9%, versus an average of 2.6% for its peers.


Vanguard Short-Term Investment-Grade ($10.46; VFSTX), yielding 4.6%, is our top pick based on its near-spotless record and low expenses. Over the last 15 years, the fund has had a single down year — a decline of 0.08% in 1994. So far in 2008, the fund is up 1.5% versus a decline of 0.5% for the average short-term bond fund. The expense ratio is a modest 0.21%. On July 31, the fund held 822 bonds with an average duration of 2.0 years. Roughly 38% of the fund is invested in AAA-rated bonds.


Vanguard Short-Term Bond ETF ($8; ASE: BSV) is an attractive pick among bond ETFs. Investors can buy and sell ETFs through any discount broker, typically for a modest commission. The fund, yielding 4.0%, holds U.S. government bonds, investment-grade corporates, and international securities with maturities of less than five years. The ETF, with nearly 950 holdings, charges a tiny 0.11% expense ratio.

FORECASTS FUND RECOMMENDATIONS
— Year-to-Date —
—— % of Portfolio ——
Fund (Price; Ticker)
Return
(%)
Rank
Conser-
vative
Growth
Baron Asset ($55; BARAX)
-14.3
A
9
9
Dreyfus Small Cap Stock Index
($20; DISSX)
-4.9
A
5
7
Fidelity Export & Multinational
($20; FEXPX)
-23.4
E
8
11
Fidelity Leveraged Co. Stock
($26; FLVCX)
-18.7
E
9
10
Fidelity Value ($64; FDVLX)
-14.5
D
9
Northern Small Cap Value
($14; NOSGX)
0.7
A
Royce Opportunity ($10; RYPNX)
-8.9
E
T. Rowe Price Int’l Discovery
($36; PRIDX)
-25.5
C
7
7
T. Rowe Price New Horizons
($27; PRNHX)
-12.2
B
USAA High-Yield Opportunities
($8; USHYX)
-4.1
E
9
6
Vanguard 500 Index ($113; VFINX)
-15.4
B
7
7
Vanguard Dividend Growth
($14; VDIGX)
-7.3
A
8
10
Vanguard Emerging Mkts. Stock
Indx. ($23; VEIEX)
-30.4
C
5
Vanguard GNMA ($10; VFIIX)
4.3
B
Vanguard Inter.-Term Tax Exempt
($13; VWITX)
2.8
B
Vanguard International Value
($32; VTRIX)
-23.0
C
9
9
Vanguard Short-Term Invest.-Grade
($10; VFSTX)
1.5
C
Vanguard Total Bond Mkt. Index
($10; VBMFX)
3.4
A
20
Vanguard Wellesley Income
($21; VWINX)
-3.2
A
Vanguard Wellington ($29; VWELX)
-8.3
A
9
10
* Rankings through Sept. 9 from Morningstar, comparing performance among funds with same objectives. A = top 20%; B = next 20%; C= middle 20%; D = next 20%; E = bottom 20%. c Closed to new investors.

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