3 short-term bond funds to ease interest rate jitters


If you worry about bonds and stocks, where are you hiding? Short-term bond funds are not a bad place. Interest rate risk is measured by duration, and the funds with the shortest duration are ultra-short bond funds followed by short-term bond funds. These funds generally have very small losses when interest rates rise. However, this security is not free. If inflation is 6% and your short-term bond fund is earning 2%, you are losing money in real terms.

3 short-term bond funds to ease rising rate jitters

These funds earn a Bronze or Silver Morningstar Analyst Rating.

  1. Fidelity Conservative Income Bonds (FCONX)
  2. Vanguard Short Term Bond Index (VBIRX)
  3. Tax-Exempt Limited Time Vanguard (VMLTX)

The Fidelity Conservative Income Bond has a term of just one-tenth of a year. As a result, it lost less than its peers in the first half of 2022, but the upside, of course, is quite limited. The Bronze-rated fund also takes on very little credit risk, so it’s really only a small step up from a money market in terms of risk and reward.

The Vanguard Short Term Bond Index is a step up in risk and reward profile. It has a duration of 2.7 years and a high quality portfolio to limit credit risk. The fund is heavily weighted in government bonds, but contains a handful of high-quality corporate bonds. The Silver-rated fund only charges 7 basis points, so almost all of the portfolio’s return goes to you, the investor.

If you are investing in a taxable account, take a look at a short term endowed fund. Vanguard Limited-Term Tax-Exempt is a great choice. Again, you get low cost and high quality. The returns are modest, but so are the risks.

All of these funds work well as a second source of money after your money market and savings account. They are boring but play a useful role in a wallet.

Russ Kinnel recommends more fund picks in 3 good funds with a great year.


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