Bonds are getting hit. What to do? Morningstar has ideas.

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Bonds have faltered somewhat in recent months as rising inflation and rising Federal Reserve interest rates have pushed yields higher.

The Bloomberg US Aggregate Bond Index is down 12% year-to-date. So what should a bond fund investor do?

It has more to do with spending needs than interest rate trends, says Christine Benz, Morningstar’s director of personal finance.

If you need that money over the next six to 10 years, a core intermediate-term bond fund is the place to go, she says. But if it’s three to five years old, consider a short-term bond fund.

Morningstar notes that you always want mutual funds with low fees, but this is especially important with short-term bond funds because, by definition, your returns are already low.

Here are the company’s most popular short-term bond mutual funds and exchange-traded funds. All of them have the highest Gold rating from Morningstar.

  1. Baird Short Term Loan BSBIX
  2. PGIM Short Term Corporate Bond pstqx
  3. Vanguard Short Term Corporate Bond ,VSTBX) – Get Vanguard ST Corp Bond Index Inst Report VCSH
  4. Vanguard Short-Term Treasury ,VSBSX) – Get Vanguard ST Treasury Index Adam Report VGSH

Short-Term Baird Bond: The fund’s “factual approach focuses on investment-grade corporate bonds, high-quality securitized loans and government bonds,” Morningstar analyst Gabriel Dennis wrote in a comment.

“The process eschews leverage, derivatives and macro trading, while its perpetually neutral style allows management to focus on security selection and sector rotation.”

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“Although the team’s long-term track record compares poorly to aggressive peers in Morningstar’s short-dated category, its vigilant approach to generally stressed markets has worked in the strategy’s favour,” said Dennis.

PGIM Short Term Corporate Bond: “That [fund’s] The strategy is unusual for a short-dated bond offering,” Morningstar analyst Eric Jacobson wrote in a comment. “Their duration is typically between 2.6 and 2.8 years. This may seem long for the comparison group, which The most recent average was taken over a period of 2.0 years.

In addition, “the fund has an unusually high exposure to corporate bonds — giving it greater exposure to A and BBB issues,” he said. “Amazingly, it has sometimes lagged behind its competitors…

But “its long-term record remains strong versus Morningstar’s short-dated category,” Jacobson said.

Vanguard Short Term Corporate Bond: “The fund tracks the Bloomberg US 1-5 Year Corporate Bond Index, which comprises investment-grade US corporate bonds. … the index is market value weighted,” Morningstar analyst Neil Kosiulek wrote in a comment.

“A passively managed, market-value-weighted index fund is a solid choice for short-term exposure to the investment-grade corporate market,” he said.

“Market value weighting helps the fund accurately capture the risk-reward characteristics of a given opportunity, using the market’s collective knowledge of the relative value of each of its holdings to shape its position.”

Vanguard Short Term Treasure: “The fund tracks the Bloomberg Barclays US Treasury 1-3 Year Index, a market price-weighted index,” Kosiulek wrote in a comment.

“For expectations… inflation and interest rates are quickly burned into government bond prices,” he said. “It is difficult for active managers to gain a sustainable advantage in this market without taking on more risk than the small amount in this fund’s portfolio.”

In addition, “this fund is among the cheapest in its class,” Kosiulek said.

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