4 Short-Term Bond Funds That Have Stood the Test of Time

With only a few weeks left in an unprecedented year, markets continue to be volatile across asset classes, recession concerns loom, and inflation persists. In these conditions, investors often look to shorter-term bond funds, and many managers have gone back to the basics to preserve capital. For the year to date through October, the short-term bond Morningstar Category is down 5.9%, a sharp contrast to the double-digit losses of longer-duration intermediate-term strategies. The past few months have proved to be a flight to quality, and having a shorter-duration stance has helped some short-term bond funds hold up better than others.

In a category that offers a wide variety between aggressive and conservative strategies, let’s explore some funds that have been our favorites over the long term to see how they’ve done and the characteristics that make them unique.

FPA New Income, which has a Morningstar Analyst Rating of Bronze and has been a Morningstar Medalist since 2011, has returned 1.4% over this period. Its shareholder-focused approach has helped this strategy compete with peers over its tenure as a medalist, and it boasts top-quartile returns on a risk-adjusted basis over this period, as measured by its Sharpe ratio. This approach and staying shorter in duration have also contributed to top-decile returns for the year to date: Its 3.6% loss ranks in the top decile and it has preserved capital significantly better than its benchmark and peers. This strategy’s ability to successfully navigate volatile markets and perform well in periods of stress continues to make it a strong pick.

Baird Short-Term Bond earns a Gold rating and consistently offers sensible exposure to short-term bonds. The conservative tilt compared with riskier peers can cause this strategy to miss out on yield, but it has still delivered returns in line with competitors’ since earning its medalist rating in 2016. For the year to date, the strategy has lost 4.5% and has held up better than three fourths of peers because of its duration-neutral style and overweight position in investment-grade credit. Long-term returns can look middling compared with more-aggressive peers, but this higher-quality posture generally will work in the strategy’s favor when markets are stressful.

Bronze-rated Fidelity Short Term Bond is another conservative option. Taking less interest-rate and credit risk has caused this strategy to generate lower returns relative to more-adventurous peers in strong markets, but it has helped this strategy in more-challenging environments. Since earning its medalist rating in 2011, it has underperformed compared with riskier peers, but an increase to the U.S. Treasuries allocation and a shorter duration (1.7 years as of October 2022) than the peer median has led to smaller losses than peers through these rocky markets. It’s down 4.3% for the year to date, which ranks in the top quartile.

For passive exposure, while Silver-rated Vanguard Short-Term Bond Index may be conservative for its category, it is still among the best thanks in part to its razor-thin fees. The portfolio’s focus on high-quality credit and government bonds (74% of the portfolio as of October 2022) differentiates it from peers. This strategy shies away from credit risk but often has a longer duration than peers. Indeed, a duration of 2.6 years is on the higher end of the category and has contributed to losses of 6.1% for the year to date, which is slightly greater than the peer median loss. This fund should hold up well when credit spreads widen but may lag in rising-rate environments. In any environment, its ongoing fee advantage will help performance here.