Fixed-income vehicles still remain an important part of retirees' portfolios, even as yields are down after the Federal Reserve lowered interest rates and bought bonds to mitigate the economic impact of the pandemic. Because of that, retirees have to be selective when adding bond funds.
Clayton DeGiacinto, managing partner and chief investment officer at Axonic Capital, says investors need to look at both bond yields and the inflation rate before buying a bond fund. If a bond yield is lower than the Consumer Price Index – an inflation gauge – it means they have negative purchasing power because they are not beating inflation. "If they want to own fixed-income assets, they will have to own bonds or securities that pay them a higher rate," he says. Here are eight of the best bond funds for retirement.
Invesco National AMT-Free Muni
Bond ETF (PZA) tracks an index of
investment-grade, U.S. municipal
bond debt. Josh Simpson, financial
advisor with Lake Advisory Group,
says his firm uses the fund for the
tax-free income it provides retirees.
"We've used it for years," Simpson
says. "It's not something that moves
a lot as far as the price goes, and it's
a consistent payer."
PZA invests in bonds with 15 years remaining to maturity and holds mostly revenue bonds. Because of the longer maturities, yields are slightly higher than other muni bond exchange-traded funds, with average credit risk. It has an expense ratio of 0.28%, which represents $28 annually for every $10,000 invested, and a yield of 2.7%.
Invesco National AMT-Free Muni Bond ETF
Simpson says his firm uses Vanguard
Intermediate-Term Bond ETF (BIV)
in tax-deferred retirement accounts,
such as individual retirement
accounts. This ETF tracks an index
that covers the entire investment-
grade fixed-income market, including
U.S. government, corporate and
international dollar-denominated
bonds. The maturities range from
five to 10 years.
The fund has 2,040 securities in its portfolio and $35 billion in assets under management. The year-to-date total return is 8%. Compared with similar bond ETFs, BIV has a higher number of U.S. Treasury notes because it takes a market-value weighting approach and it doesn't include agency mortgage-backed securities. It also comes with an expense ratio of 0.05%.
Vanguard Intermediate-Term Bond ETF
Chuck Self, chief investment officer
for iSectors, says he likes Nuveen
Select Tax-Free Income Portfolio
(NXP) for retirement accounts. For
investors who are in higher tax
brackets and not dependent on the
day-to-day movements in a fund,
NXP can be a good choice because
these investors can afford to take a
little extra market price risk.
Holdings in the fund have an average maturity of about 20 years, so it is subject to more volatility. "To get 3.5% tax-free is pretty nice, especially when you get less than 1% in Treasurys," Self says. NXP is a closed-end fund with little leverage, which is rare for a closed-end fund, he says. Self warns against investors trying to get more yield with riskier bonds, pointing to the March sell-off. "I encourage investors to think about the downside risk of any bond funds that they buy," he adds.
Nuveen Select Tax-Free Income Portfolio
Invesco National AMT-Free Muni Bond ETF (PZA)
Vanguard Intermediate-Term Bond ETF (BIV)
Nuveen Select Tax-Free Income Portfolio (NXP)
First Trust Low Duration Opportunities ETF (LMBS)
Fidelity Total Bond ETF (FBND)
PIMCO Active Bond ETF (BOND)
SPDR Blackstone/GSO Senior Loan ETF (SRLN)
VanEck High-Yield Municipal ETF (HYD)
First Trust Low Duration
Opportunities ETF (LMBS) holds
mortgage-backed securities with an
average duration of less than three
years. It holds a variety of bonds
including agency, nonagency-backed
and commercial mortgage-backed
securities.
Self says this is a good fund for
investors who are concerned about rising interest rates, and with 90%-plus government securities, there are few credit-risk worries. He points out LMBS' total return was flat in the first quarter, being one of the few non-Treasury bond funds to not lose money during the market sell-off. At 0.67%, it has a slightly higher expense ratio for an ETF, Self says, but he points out that's because it's an actively managed ETF. It has $5.6 billion in assets under management and a yield of 2.2%.
First Trust Low Duration Opportunities ETF
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An actively managed ETF, Fidelity
Total Bond ETF (FBND) uses the
Bloomberg Barclays U.S. Universal
Bond Index as a way to guide its
sector allocation and duration
exposure.
Marc Pfeffer, chief investment officer
at CLS Investments, says the
managers try to keep the duration
fairly neutral to the broader Bloomberg Barclays U.S. Aggregate Bond Index, a key bond benchmark. "They've done a fairly good job navigating through this crisis," he says. FBND uses the same management team and strategy of the Fidelity Total Bond Fund (FTBFX). Holdings include up to 20% high-yield bonds, plus U.S. Treasurys, mortgage-backed securities and corporates, among other securities. The fund's expense ratio is 0.36%.
Fidelity Total Bond ETF
Pfeffer says PIMCO Active Bond
ETF (BOND) can be a good choice
for a core fixed-income holding, as it
has a diversity of holdings and a solid
yield. It's an actively managed ETF,
so its expense ratio is higher than a
benchmark ETF like the iShares Core
U.S. Aggregate Bond ETF (AGG),
but the 12-month yield of 3.1% more
than makes up for the price of 0.73% annually. It holds bonds with a duration around five years – short enough that if rates go down, investors are protected, but long enough to have a decent yield. "It's held up pretty well this year," Pfeffer says, noting it has a positive total return this year.
PIMCO Active Bond ETF
SPDR Blackstone/GSO Senior
Loan ETF (SRLN) got hit "very hard"
during the spring downturn, but the
fund has rebounded since, Pfeffer
says. Year to date, it's down 4.8% –
though it's up about 22% since
March. For investors willing to take
on additional risk for higher yield,
SRLN could still be a good choice.
It's an actively managed bond fund that has exposure to domestic and foreign noninvestment-grade, floating-rate senior loans. The fund has a very short duration as it resets every three months. Most of the price appreciation is likely in the return, but the yield is strong at 5.4%. The expense ratio is 0.7%. Investors "still have to be cautious overall, but if you're willing to take risk, that's a good place," he says.
SPDR Blackstone/GSO Senior Loan ETF
For aggressive investors seeking tax-
free income, Pfeffer chooses VanEck
High-Yield Municipal ETF (HYD),
which tracks a market-weighted index
of high-yield, long-term, tax-exempt
municipal bonds. It has a duration of
6.97 years, with $2.8 billion in AUM,
which makes it a very liquid fund.
"Municipality defaults remain
extremely low," he says. "However, there is a heightened sense of credit risk in the muni market since the (pandemic) panic." Pfeffer believes the spring sell-off in the muni market was overdone. Although the fund is down nearly 6% year to date, it's up about 38% in the last few months. HYD's 12-month yield is 4.4%, and its expense ratio is 0.35%.
VanEck High-Yield Municipal ETF
