Bond prices have been volatile in recent years as the Federal Reserve hiked interest rates to combat high inflation, but with rate cuts underway, investors may still be able to take advantage of attractive yields in short-term bonds.
Here’s what you should know about short-term bond funds and some of the best ones to consider for your portfolio.
Short-term bond funds are mutual funds and exchange-traded funds (ETFs) that typically invest in government and corporate bonds with maturities of less than five years. Bonds with shorter times to maturity are less sensitive to changes in interest rates than longer-term bonds, meaning investors won’t suffer as much if rates head higher. Remember, interest rates and bond prices move in opposite directions, so as rates rise, bond prices fall and vice versa.
Investors in short-term bond funds earn a yield, which measures the income produced by the bonds in the portfolio relative to the current market price.
Short-term bond funds can make sense for many different investors, but they’re particularly well-suited for those saving towards short-term goals. Money that you think you’ll need in the next three to five years can be invested in short-term bonds.
Pay special attention to a fund’s expense ratio, or fee, before investing. All else being equal, the lower the expense ratio is, the better off you’ll be as an investor.
*Data below as of Dec. 31, 2024.
The SPDR Portfolio Short-Term Corporate Bond ETF aims to track the performance of the Bloomberg U.S. 1-3 Year Corporate Bond Index. The fund offers exposure to U.S. corporate bonds with maturities between one and three years.
This iShares fund aims to track the performance of an investment-grade corporate bond index with maturities between one and five years. Holdings include bonds issued by Bank of America, Wells Fargo and Microsoft.
The Schwab 1-5 Year Corporate Bond ETF seeks to track the total return of an index measuring the performance of the short-term U.S. corporate bond market. The fund holds corporate bonds with remaining maturities between one and five years.
The Vanguard Short-Term Bond ETF aims to track the performance of a market-weighted bond index made up of investment-grade bonds with a dollar-weighted average maturity of 1-5 years. The fund holds government bonds, high-quality corporate bonds and investment grade international dollar-denominated bonds.
