Why does anyone own bond funds?

[Spock]

Can't beat a good dividend growth etf. The high quality ones like SCHD, DGRO, VYM, VIG, etc,. are just about bulletproof.

Me thinks you just painted a target on them.

 

[Texas Proud]

It makes a big difference when you buy... I am only going off the FF rate and have not checked this out by looking at funds..

If you bought in 1980 to 1981 when rates were in the mid teens... and held till say 2000 you would think bond funds were the best thing around... you got a high interest rate and since rates were dropping got an increase in NAV...

But, if you bought late 2008 early 2009... interest rates were near zero... so no interest or price increases... and then 2022 comes and interest rates go up quickly tanking your NAV.. much more than the interest rate can go up without new money..... so a bad time to buy...

I would bet that most funds are starting to get their older lower rate bonds matured and buying higher rate ones... so the rate you get should be going up... and if the FF rate comes down then you would get NAV increases.. so maybe a good time to buy...

 

[dobig]

It makes a big difference when you buy... I am only going off the FF rate and have not checked this out by looking at funds..

If you bought in 1980 to 1981 when rates were in the mid teens... and held till say 2000 you would think bond funds were the best thing around... you got a high interest rate and since rates were dropping got an increase in NAV...

But, if you bought late 2008 early 2009... interest rates were near zero... so no interest or price increases... and then 2022 comes and interest rates go up quickly tanking your NAV.. much more than the interest rate can go up without new money..... so a bad time to buy...

I would bet that most funds are starting to get their older lower rate bonds matured and buying higher rate ones... so the rate you get should be going up... and if the FF rate comes down then you would get NAV increases.. so maybe a good time to buy...

As long as a person stays patient, something always happens where great opportunities arise to those swift enough to take advantage. 2022 Fed increases, SVB collapse, tariff tantrum, etc,.

 

[pb4uski]

Moved out of bond funds years ago and into individual CD's and MYGA's. Minimum research required. Too much work (for me) for individual bonds.
Don't really see the advantage of bond funds unless we are in a very high interest rate environment directionally moving lower.

Similiar here. I bailed on bond funds but actually too early. These days, I favor iBond target-maturity bond ETFs. They come in Treasury, TIPS, corporate, muni and high-yield "flavors" and a wide variety of maturity years. I currently only have the corporate and high-yield versions. I doubt that I would ever use them for Treasuries or YIPS as it is easy to just by individual Treasuries or TIPS and I don't need munis. The ER is 0.10% for corporates and 0.35% for high-yield.

A mix of 2026-2033 maturities that are 10% high-yield and 90% investment-grade would yield 4.62% and consist of 16 tickers, so pretty easy to manage.

 

[Lorenzo]

The bond portion of my portfolio has been entirely BND for the past 15 or more years, and it chugged along and served its purpose until around 2022 when the interest rate hikes happened. Now that I'm retired I am planning for the bond portion of my portfolio to become a ladder of individual bonds (or maybe target-maturity ETFs) for income. BND and the like are not currently serving the purpose they had been intended to in my portfolio. I may put a small amount in a high-yield bond fund.

 

[MichaelB]

I’m comfortable with bond index funds which are generally very high credit quality, and is why I switched to them long ago from actively managed bond funds. Bond index funds also have extremely small expense ratios. I rebalance occasionally and appreciate the liquidity. I definitely don’t want to manage individual bond issues. Because I rebalance occasionally the fund volatility is not a problem for me.

I may be the only one left, ha ha.

No, you’re not alone here.

 

[COcheesehead]

Pro tip for anyone evaluating bond fund’s performance over the last few years. Check out what happened in 2022.
One of the two easiest market timing mechanisms for the average Joe is interest rates. Rising kills bonds. Falling helps bonds.

 

[hesperus]

The interest rate spikes over the last few years absolutely crushed bond fund NAVs, especially for funds with longer durations. If you need the principal to be 100% stable, a CD or individual bonds held to maturity are definitely better than a fund. You're seeing the downside of total market funds during a hiking cycle.

 

[Fermion]

The bonds smoothed out your gains. See, without the bonds you would have had really big gains, but with the bond losses, your gains were much lower. Wait...

 

[CalBird]

Bond/bond fund are less volatile than stock. If lost decade happens again, you will need some money to survive without damaging too much to the portfolio.

 

[Dtail]

It’s no work to buy brokered CD at Fidelity. When the CD matured, the money is deposited into your core MM fund, paying 3%+ interest. If buy directly thru a bank or credit union, you do need to track maturity date. Over the past 5 years, I’ve averaged 3.60% interest per year

Yup, that's what I do. Individual bonds are more work, but not so much CD's held at a big institution.

 

[Aerides]

10 years ago it wasn't a bad idea at all. Or 5 years ago. I'd guess a lot of folks that have them don't much do more than "set and forget" and their total return is good enough that they aren't looking at the details.

 

[audreyh1]

10 years ago it wasn't a bad idea at all. Or 5 years ago. I'd guess a lot of folks that have them don't much do more than "set and forget" and their total return is good enough that they aren't looking at the details.

Our total return has certainly been good enough and I totally look at details. It’s just that our diversified portfolio works as a whole, so I don’t tinker with the parts other than occasionally rebalancing.

 

[Montecfo]

A bond fund is a tool. Like most tools bond funds are useful when used correctly. Many people misunderstand them and used them incorrectly.When rates began to rise they held on to funds with a duration of 5,6,7 etc. So that's the percentage they lost for each 1% of the rate rise. Yes indeed, huge losses.

When the Fed signals (and signals and signals) that a rate rise is about to begin, believe them. And get out of those high duration funds and into money markets, variable rate securities or, for extra credit, a closed-end fund holding variable rate securities and trading at a discount. Such funds posted excellent returns during the run up.

Bond funds have many advantages. They are great for rebalancing, creating a diversified portfolio with small amounts of funds, etc. I prefer actively managed funds which can move between sectors and have some flexibility on credit quality (another advantage of a fund, you can accept reduced credit quality since you have a diverse portfolio). I want smart managers with excellent track records managing my bond funds. Index bond funds I do not favor because I want smart managers making the allocation decisions. I do not wish to blindly buy bonds of companies with the most debt. The value proposition for indexing bonds is different than equities.

So, I own laddered bonds and bond funds. Each has its own role and pros and cons. Folks that suggest one is always better than the other misunderstand this, in my opinion.

A saw makes a terrible hammer, but a skilled carpenter carries both and uses as appropriate.

 

[foxfirev5]

I got rid of the Bond funds when I retired 10 years ago. After I no longer qualified for my 401k stable value fund I started out with a 5 year CD ladder. When rates started climbing in late 2022 I added to my 15 year Treasury Strip ladder and I Bonds. When TIPS got above 1% real I built a 10 year ladder which would cover all expenses. However the big advantage for me is the flexibility of the maturing rungs. While currently rolling over all maturing bonds, I plan for the ladder becoming more of a hybrid with a portion taken for consumption (RMDs) and the rest rolled over.

I've got a very basic spreadsheet which requires hardly any time to manage. Actually I really don't even need the spreadsheet as the Fido Income Analysis tool does a great job on its own.

 

[Al18]

The balanced funds FBALX and VWELX have done well over the past 10+ years. Both are actively managed funds

 

[FlyingCircus]

12-14% total returns from responsibly managed high yield funds, reinvested, when interest rates are stable or dropping.
3.5% -4% on treasury funds instead of point 1% in cash in a bank.
Absolutely depends on what sectors they're holding for debt and how much leverage they're using to juice returns.

 

[jazz4cash]

Bond funds are OK but they are quite different from individual bonds. Stock mutual funds are very similar to individual stocks and we’ve been lulled into thinking the relationship of bonds to bond funds is similar. Lack of a maturity date is the primary difference but you could but target maturity funds to address that. I only have individual bonds at this time with no plans to change with possoble exception of a target maturity or home state muni fund. .

 

[timbervest]

SWCAX (Schwab California Tax-Free Bond Fund) -- TTM Yield 3.24% Fed and State tax free. For those who may be in the higher tax brackets (and in California you get there quickly) this could be a 6% taxable equivalent.

 

[ArmchairMillionaire]

I’m comfortable with bond index funds which are generally very high credit quality, and is why I switched to them long ago from actively managed bond funds. Bond index funds also have extremely small expense ratios. I rebalance occasionally and appreciate the liquidity. I definitely don’t want to manage individual bond issues. Because I rebalance occasionally the fund volatility is not a problem for me.

I may be the only one left, ha ha.

I currently have almost 70% of my 401(k)s, IRA, Roth-IRA, and taxable account funds in bond index funds, while the other 30% is in US large-cap index, US small-cap index, and international index funds, respectively. (10% each)

Those retirement funds collectively are up almost 5% since I retired back in July, even though I withdrew almost 1.5% in September to fund the second half of 2025 and another 3% in January to fund our 2026 living expenses. I also switched from a 60/40 allocation to a 30/70 allocation in October, so I did make some additional gains in those three months before I went more conservative.

So the bond index funds must not be losing me too much money.

 

[Diogenes]

As long as a person stays patient, something always happens where great opportunities arise to those swift enough to take advantage. 2022 Fed increases, SVB collapse, tariff tantrum, etc,.

That requires simultaneously "being patient" and being "swift enough". Aren't those opposing character traits? If I am patient, yay me, draw a star on my homework assignment... but patient is, as patient does. How would I know when to cease being patient, and to start being swift? Likewise the swift, and swift here and swift there, swiftly to and fro. When do the swift settle-down, becoming patient? Many, perhaps, are neither swift nor patient. They lack both the verve and the discipline. But how many successfully wield both?

 

[Semi-Retyrd]

As I have said in earlier posts on the subject, bond index funds are at a disadvantage to their actively managed cousins because there is relatively little individual bond analysis available and lots of lousy bonds out there.

Funds like BND own all the lousy bonds as well as all the good ones where funds like DODIX at least try to weed out the bad ones and often succeed.

So if you want a set it and forget it bond fund that will always beat an index like BND, choose an actively managed one like DODIX. (Note - many actively managed bond funds are also bad, so use a screener to find the few good ones or if you are lazy choose DODIX). Conclusion - Don't ever use BND.

Then the next step toward bond fund happiness is to understand what others here have stated - don't own standard bond funds when interest rates are rising. No matter how good a bond picker is in an actively managed core bond fund, when the tide is against you, you are going to lose. Example - 2022.

Is this timing? Yes. but it is pretty easy to listen to what the Fed folks are saying and dodge the bullet.

Finally you may ask - What about now? Here is what my crystal ball says - short term interest rates are not going to change much if at all this year. Maybe down a little next year. Long term rates may go up a little this year. Result - intermediate core bond funds won't change much this year and return around 4% give or take a little. The crystal ball also adds watch out for any continuing rise in inflation. If inflation rises above 3.5%, its time to dump your bond funds.

FYI my personal bond exposure is primarily through EGRIX, an alt fund with heavy emerging market exposure that takes both long and short positions in mostly sovereign bonds to dampen volatility. It crushes funds like BND with less risk. Which one would you have liked to own over the past five years?

 

[VanWinkle]

Bonds funds are meant to make money for companies that run those funds. If investors happen to make any money in them.. thats happenstance!

Isn't that true of all funds?

 

[VanWinkle]

Bonds are an income play, and even when the NAV is reduced by rising interest rates, the income is steady or rising. Everyone is happy with dividend income because they never sell the stock. The same can be used for bonds, take the income but never sell the fund. Of course the other advantage is to limit portfolio losses in a downturn (most of the time).

 

[Onda]

Bonds are an income play, and even when the NAV is reduced by rising interest rates, the income is steady or rising. Everyone is happy with dividend income because they never sell the stock. The same can be used for bonds, take the income but never sell the fund. Of course the other advantage is to limit portfolio losses in a downturn (most of the time).

Income that usually does not rise very much — and often loses purchasing power after inflation.

On the other hand, if you bought SCHD around its 2012 launch, you would now be collecting roughly a 12.5% yield on your original cost. That is the beauty of good dividend-growth stocks: the income can grow over time, and qualified dividends also receive preferential tax treatment.

So yes, bonds can provide income and dampen volatility, but they are not the same kind of income engine. Stocks can give you income that grows.