Bonds Beating Stocks This Year

9/12/2011


As concerns regarding the global economy, Europe's sovereign-debt crisis, and corporate profits have weighed on stocks, bonds have managed solid gains. Barclays U.S. Aggregate Bond Index has gained 6.7% this year, versus a 6.1% decline for the S&P 500 Index.

If you're shopping for bonds, keep the following points in mind:

• Our favorite pick is a diversified mutual fund — Vanguard Short-Term Investment-Grade ($11; VFSTX). A solid all-weather performer, we've long used this fund for short-term reserves within our recommended equity portfolios. Vanguard Short-Term Investment-Grade has more than 1,200 holdings, mostly investment-grade corporate bonds and a few government securities, all maturing in less than three years. The fund, yielding around 1.7%, has had only one losing year since 1996.

• Cash parked in money-market funds or short-term government bonds earns very little. Conservative investors who insist on holding only Treasurys should consider trading up to intermediate-term bonds. While we don't recommend any all-Treasury funds in our mutual-fund portfolios, Vanguard Intermediate-Term Treasury ($12; VFITX) is a solid choice and yields 1.0%.

• Investors willing to take on more credit risk should consider high-yield (junk) bonds. Junk bonds are issued by companies unable to earn an investment-grade rating, making them more sensitive than other bonds to the outlook for the economy. High-yield bonds yield around 8.7%, versus just 2% for the 10-year Treasury note, for a spread of 6.7% — well above the norm of 6% since 2000. Wells Fargo Advantage High Income ($7; STHYX), yielding 6.9%, is our top choice in this sector.

FUNDS FOR INCOME
-------- Total Return --------
Fund (Price; Ticker)
Est.
Yield
(%)
Year-
To-Date
(%)
12
Months
(%)
3-Year
Annual.
(%)
Average
Credit
Quality
Duration
(In Yrs.)
Expense
Ratio
(%)
Category
Recommended Mutual Funds
Vanguard GNMA ($11; VFIIX)
3.2
6.6
7.0
7.7
AAA
3.6
0.23
Mortgage-backed
Vanguard Inter.-Term Tax
Exempt ($14; VWITX)
2.4
7.1
3.1
5.4
A
5.7
0.20
Municipal
Vanguard Short-Term Invest.
Grade ($11; VFSTX)
1.7
1.8
2.4
4.7
A
2.3
0.22
Short-term
Vanguard Total Bond Mkt. Index
($11; VBMFX)
2.3
6.6
6.0
7.2
AA
5.2
0.22
Intermediate-term
Vanguard Wellesley Income
($22; VWINX)
3.2
4.2
7.9
7.8
A
5.9
0.28
Balanced — bond bias
Wells Fargo Advantage High
Income ($7; STHYX)
6.9
1.4
6.6
8.4
B
4.3
0.93
High yield
Notable Exchange-Traded Funds
iShares Barclays 1-3 Year
Treasury ($85; SHY)
0.1
1.3
1.4
2.5
AA
1.9
0.15
Short-term government
iShares S&P Conservative Allocation
($29; AOK)
2.6
2.1
5.5
NA
BBB
4.5
0.30
Balanced — bond bias
iShares S&P National Municipal
($106; MUB)
2.7
9.1
2.7
5.2
A
7.4
0.25
Municipal
SPDR Barclays Capital Aggregate
($58; LAG)
2.7
6.6
5.9
7.4
AA
5.1
0.17
Intermediate-term
SPDR Barclays Capital High Yield
($38; JNK)
8.4
(0.4)
6.0
8.2
B
4.6
0.40
High yield
Vanguard Mortgage-Backed
($52; VMBS)
2.7
5.1
5.5
2.3
AAA
4.4
0.15
Mortgage-backed
Vanguard Short-Term Bond
($82; BSV)
0.7
2.8
2.7
4.4
AA
2.6
0.11
Short-term corp.

 


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