Keeping it short and sweet.
January 12, 2011 5:03 AM   Subscribe

In these uncertain times, which short-term mutual bond funds offer the best bang for the buck?

In years past, Vanguard Short Term Investment was my go-to short-term bond fund for minimizing risk and maximizing return. Apart from a steep, 10% drop after the Lehman Brothers crash in '08, the NAV is stable year in, year out. And the return is decent for a short-term bond fund.

The problem is, I'm a little heavier in this particular fund than I'd prefer. I'm beginning to feel that I should look for a different fund managed by a different company with the same profile.

1. Does such a short-term bond fund, with a stable NAV complemented by a decent return, exist in today's market? If so, what is it?
2. If it turns out that Vanguard Short Term Investment is my best option, what are the risks in being heavily positioned in this--or any--short-term mutual bond fund?
posted by Gordion Knott to Work & Money (2 answers total) 4 users marked this as a favorite
I am not your advisor, but when I have some GIC's maturing, I'm planning to put the proceeds into a 1-5 year laddered corporate bond exchange traded fund. I'm in Canada, so the fund I will be using is the Claymore CBO exchange traded fund.

Adding all possible disclaimers to this advice. Also, I'm retired and living off my dividends/interest and pension (small) income.
posted by mbarryf at 5:41 AM on January 12, 2011

I have 100% of my bond position in Vanguard Short Term Investment Grade.

When you look for fund companies, especially for bonds, expense ratio is the most important factor. With rates currently so low, this is even more important because expenses become such a large percentage of the return. Vanguard has the lowest expenses in the country. There is no point in looking for another fund company with the same fund profile. They aren't going to give you a higher yield without taking on more risk. And because they have higher expenses, they have to compensate by increasing risk to provide the same yield as Vanguard.

Returns on bond funds are directly related to risk. If you want a higher yield, you have to take on more risk. There is an old saying that more fortunes have been lost seeking higher yields in the bond market than were ever lost in the stock market, so don't go stretching for yield if what you really want is safety.

If you want low risk, stick with short bonds. The Short Term Investment Grade invests mostly in corporate bonds so there is a small risk of default. If you want more safety, use the Short Term Federal or Short Term Treasury funds. They are 100% backed by the government, but have correspondingly lower yields because they are lower risk. If you are willing to take on slightly more risk, you could transfer some of your bond position to the Vanguard Intermediate Term bond fund. Just keep in mind that if interest rates rise, the longer term bond funds will have a greater NAV decline.
posted by JackFlash at 9:53 AM on January 12, 2011

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