Bonds Beating Stocks This Year
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.